SINGAPORE (Apr 2): Despite a fairly strong set of 2QFY2020 results, SPH REIT held back on distributions to unitholders in anticipation of near-term challenges brought about by the Covid-19 outbreak. 

The REIT posted distribution per unit (DPU) of 0.3 cent for the quarter ended February, a 78.7% decline from DPU of 1.41 cents a year ago. This brought its half-year DPU to 1.68 cents, or some 39% lower than 1HFY2019. 

But not all was doom and gloom, as SPH REIT booked increases across several other financial metrics. For instance, gross revenue for the quarter increased 26.1% y-o-y to $73.3 million, while net property income came in 23.3% higher at $56.5 million. 

See: SPH REIT's 2Q DPU plunges 79% to 0.3 cent as Covid-19 uncertainties loom

In a Thursday report, Maybank Kim Eng Research analyst Chua Su Tye says the REIT’s latest earnings call reflects an operationally “steady quarter”. Yet, the group remains susceptible to retail headwinds on the back of the escalating virus outbreak. 

“Management shared that its retail and F&B businesses were adversely impacted by the stricter social distancing measures introduced at end-Mar 2020 to control the spread of Covid-19,” says Chua, who identifies bright spots in the REIT’s supermarket, pharmacy and take-away food tenancies which have been holding up well.

“We see further erosion in shopper traffic and tenant sales in 3Q20 due to the tight restrictions on inbound tourists,” he adds. 

Looking ahead, CGS-CIMB Research analyst Eing Kar Mei is anticipating a tougher year ahead for the REIT in terms of rental lease renewals. 

“We believe lease renewals in FY2020 will be challenging due to Covid-19. We understand that Australia tenants are also asking for rental rebates,” says Eing. 

Yet, Eing acknowledges that SPH REIT is making significant efforts to mitigate the adverse impact of the virus on its tenants through the passing on of government property tax rebates, as well as doling out $4.6 million in rental rebates over February and March. 

“In April and May, the REIT will be giving out up to 50% of base rent to the most affected tenants. This is in addition to the full property tax rebates that will be passed on fully to tenants,” says Eing. 

“Effectively, the most affected tenants will have base rents waived for up to two months,” she notes. 

Although SPH REIT has some $280 million of debt due in FY2020, Eing opines that refinancing is not going to be an issue as both The Clementi Mall and The Rail Mall are unencumbered. In addition, the REIT’s gearing for 1HFY2020 stood at 29.3%, making it one of the lowest geared Singapore REITs. 

Maybank’s Chua agrees, citing the REIT’s balance sheet to be “strong”, with an estimated $1.1 billion in debt headroom to support further deals. However, Chua believes that new acquisitions are unlikely in the near term at least, as the management shifts its focus to tenant retention. 

Although SPH REIT’s low DPU might be a cause for concern for some investors, DBS Group Research analyst Derek Tan is quick to note that REITs in general could switch their focus to conserving cash during this difficult period. 

“Cash is king,” says Tan. “S-REITs may consider looking at conserving cash through lower DPUs in the upcoming two quarters to be used for a rainy day,” he adds.

For now, Tan is bracing for a tougher operating environment given rising consumer risk aversion, as well as tighter government measures to minimise the spread which will in turn keep crowds and spending away from malls. 

Yet, he remains optimistc on the proposed new Covid-19 temporary measure bill that is slated to be released in Parliament next week. 

“The potential release of a Covid-19 temporary measure bill which absolves tenants of their rental obligations for up to 6 months will introduce further uncertainty to an already challenged retail sector,” says Tan. 

“The risk from the bill is that if tenants/businesses go bust after 6-12 months even with rent deferment, landlords will be faced with a potential spike in bad debts,” notes Tan. 

“This is a factor we believe has yet to be addressed, to be fair to landlords who have their own obligations to fulfill,” he adds. 

In light of the recent events as well as a bleaker outlook, Maybank has downgraded SPH REIT to a “hold” from the previous “buy”, slashing its target price by some 30% to 80 cents. DBS, too, has downgraded the REIT to “fully valued” with a target price of 70 cents. 

However, CGS-CIMB remains slightly more optimistic on SPH REIT, and is choosing to reiterate its “buy” call with a lower target price of $1.12. 

As at 11.24am, units in SPH REIT are trading 4.5 cents lower, or 6% down, at 70.5 cents.