SPH REIT - Awaiting More Catalysts
- SPH REIT (SGX:SK6U)'s 9MFY22 (Sep 2021 to May 2022) revenue grew 1.0% y-o-y to S$211.6m, driven by the Singapore portfolio (+2.1%) which offset the 2.5% y-o-y deterioration in Australia revenue. SPH REIT maintained high portfolio occupancy of 97.6%.
- YTD 3QFY22 sales in Singapore and Australia were ~12% and ~2% higher y-o-y.
- Tenant sales at Paragon jumped 45% y-o-y upon the return of tourists, after the removal of isolation and COVID-testing requirements on 1 Apr 2022, with May 2022 tenant sales reaching 110% of pre-pandemic levels. We understand from management that the sustained reopening in Singapore has returned confidence to retailers, resulting in shorter lease deliberation and narrowing negative reversions.
- Tenant sales in Australia recovered strongly in Apr 2022 as restrictions were gradually lifted following moderating COVID-19 caseloads. 3QFY22 tenant sales at Westfield Marion improved 9.0% y-o-y, lifted by travel-related consumer spending as Australia opened its borders in Feb 2022.
- While Singapore lease expiries have been largely de-risked (only 0.7% of GRI remain), the prolonged wave of new COVID-19 cases in Australia has resulted in a softer leasing environment, leaving us cautious about the 17.3% of GRI expiring in FY22.
- While average cost of debt remained stable q-o-q at ~1.7%, SPH REIT’s interest rate hedge deteriorated from 73% to 62%, one of the lower interest rate hedges among S-REITs. Approximately 4.2%/25.4% of borrowings are up for refinancing in FY22/23. Assuming interest rates remain at this level, we could see SPH REIT's interest costs increase by ~S$5m or 20% in FY23.
- While it is still early days, the change of sponsor could potentially see more assets added to SPH REIT’s ROFR list. However, mounting macroeconomic risk and elevated interest rates may push acquisition plans further out into FY23/24.
- Reiterate HOLD on SPH REIT with unchanged DDM-based target price of S$0.95. Market seems to have priced in a recovery.
- While SPH REIT has one of the lowest gearing levels (30.1%) among its S-REIT peers, putting it in a better position to structure accretive acquisitions by utilising a higher proportion of debt funding, geopolitical, inflationary and interest risks may put acquisitions on hold.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2022-07-07 2022-07-07
Read also CGS-CIMB's most recent report:
2022-10-10 SPH REIT - Tenant Sales Normalizing.