Excerpts from CGSCIMB report

SPH Reit (SGX: SK6U)

• Change of FY from 31 Aug to 31 Dec. FY22 will be a 16M period ending 31 Dec 22. 12M22 DPU of 5.52 Scts (+2.2%) in line at 78.3% of our 16M22F.
• Tenant sales across portfolio recovered to 89%-99% of pre-COVID levels. Negative portfolio reversions narrowed yoy from -8.4% to -2.8% in 12MFY22.
• FY22-24F DPU tweaked -0.1%-33.7% due to change in FYE/higher rental growth assumptions. Recovery priced in.

Stay Hold, higher S$0.96 DDM TP.

SPH Reit 12M22 DPU of 5.53 Scts (+2.2%) was in line, forming 78% of 16M22F

SPH Reit (SPHREIT) has announced a change of FYE from 31 Aug to 31 Dec to align with its sponsor, Cuscaden Peak. FY22 will be a 16M period from 1 Sep 21 to 31 Dec 22.

12MFY22 DPU of 5.53 Scts (+2.2% yoy) was in line, forming 79% of our 16MFY22F. 12MFY22 revenue grew 1.7% yoy on the back of lower rental reliefs given and step-up in rents while NPI margin grew 3.5% on NPI margin improvements due to lower property expenses.

Portfolio occupancy fell 1.3ppts from 98.8% to 97.5% as occupancy gains in the SG portfolio were offset by occupancy loss in the Australian portfolio.

SPHREIT’s balance sheet is robust with low cost of debt of 1.77%, gearing at 30%. Additionally, 71% of debt is on fixed rates, with 25.4% of debt maturing in FY22-23F.

Improving operating metrics and tenant sentiment

Tenant sales improved across all assets, increasing 25.6%, 8.8%, 4.8% and 1.8% yoy at Paragon, Clementi Mall, Westfield Marion and Figtree, respectively.

Tourist spending accounted for c.30% of Paragon’s pre-COVID tenant sales. Despite Sep 21-Aug 22 international visitor arrivals coming in 83% below pre-COVID levels, 12MFY22 tenant sales at Paragon recovered to 89% of pre-COVID levels.

While portfolio reversions were negative at 2.8% for 12MFY22 (2.6%/3.9% for its SG/Australia portfolio), this was an improvement compared to FY21 reversions of -8.4%.

Recovery in tenant sales has lifted tenant sentiment, however, this was not captured in 12MFY22 reversion numbers as SPHREIT typically commences renewal discussions six months prior to lease expiry.

Going forward, we think the portfolio could start showing positive reversions. Aug 22 valuation for the Singapore and Australia portfolio improved S$42.5m (1.3% yoy) and A$6.5m (0.8% yoy), driven by higher rental income while cap rates remain stable.

Potential organic growth from AEIs & enhanced asset efficiency

FY22-24F DPU tweaked by -0.1%-33.7%, mainly due to change in FYE and higher rental growth assumptions. SPHREIT could potentially improve asset efficiency under the direction of its new property-led sponsor, Cuscaden Peak.

Valuation/Recommendation

SPHREIT is trading at an annualised 5.9% FY22F DPU yield, at +0.6 s.d. of historical average. Potential catalysts include AEIs and accretive acquisitions, although mounting macroeconomic risk and elevated interest rates may push acquisition plans further out into FY23/24.

Downside risks include weaker-than-expected rental reversion and softening in consumer spending.

SPH Reit share price chart

You can find the full report here and the company website here