SINGAPORE (June 1): When SPH REIT cut its distributions to unitholders for 2QFY2020 by 79% to a DPU of 0.3 cent, analysts were not so positive on the REIT’s outlook on the possible near-term challenges arising from the Covid-19 global pandemic.

However, DBS Group Research analyst Dale Lai and the Singapore research team has upgraded SPH REIT to “hold” from “fully valued” in a May 29 report, on the REIT’s retained income from its lowered DPU. The income was used to offset tenant rentals during the circuit breaker period.

SPH REIT, which will be providing up to 2.3 months of rent relief to selected tenants, is the most generous amongst the retail landlords.

Due to this, the REIT will unlikely have to provide more rental relief if the government’s proposed Rental Waiver Bill announced during Fortitude Budget – where landlords have to potentially give up to two months’ worth of rental relief – comes to pass in June this year.

SPH REIT’s low gearing of 29.3% and conservative capital structure also provides it with the financial flexibility to pursue opportunities and to weather potential capital rate expansion.

Despite this, Lai and the team expect the REIT’s Paragon mall to suffer from short-term weakness owing to the gradual reopening of retail businesses. Luxury retail malls and tourist arrivals are expected to remain muted during the ongoing Covid-19 outbreak.

Rental reversions for the rest of FY20 are also expected to weaken due to majority of lease expiries from Westfield Marion in Adelaide, Australia.

“Despite ongoing uncertainties caused by the COVID-19 pandemic, we see limited downside risks to SPH REIT’s earnings forecasts. Its prudence in making provisions for tenant rental relief should provide some buffer to revenues for the rest of FY20,” say the analysts.

As SPH REIT is currently trading a Price to Net Asset Value (P/NAV) ratio of around 86 cents, Lai and the team have increased their target price for the stock to 80 cents from its previous 70 cents. The current price represents a 3% downside on the counter, and is based on a 10-basis point cut to beta.

As at 4.15pm, units in SPH REIT are changing hands 2.4% up at 85 cents.