A brighter year ahead

■ SPH’s 1QFY22 business update showed resilient tenant sales.
■ Operating environment points towards a recovery.
■ Reiterate Add. Expect easing rental pressure. Paragon is a reopening play

Tenant sales recovered quickly after the lifting of restrictions

SPH REIT’s 1QFY22 portfolio occupancy rate remained high and maintained at 98.8% qoq, in line with its strategy of maintaining high occupancy and stable cashflow. Tenant sales in Singapore stayed relatively resilient in 1QFY22 despite the dine-in restriction of only 2 pax for half of 1QFY22 vs. 5 pax in 1QFY21. While Paragon’s tenant sales declined by 7% yoy in 1QFY22, it quickly recovered to 70% of pre-Covid 19 levels in Nov 2021. As opposed to the performance of Paragon, tenant sales of Clementi Mall increased 5% yoy in 1QFY22 and achieved c.90% of pre-Covid 19 levels in Nov 2021, thanks to its position as a suburban mall, stronger tenant mix from new F&B concepts and click-and-collect sports retailer Decathlon introduced last year. In Australia, Westfield Marion continued to demonstrate its dominance in Adelaide with tenant sales increasing 6% yoy and exceeding pre-Covid 19 levels in Nov 2021 due to its position as a super-regional shopping centre in Adelaide. While Figtree Grove’s tenant sales declined to 50% of pre-Covid 19 levels in Sep 2021 due to a 1.5 month lockdown, it quickly rebounded to 80-90% of pre-Covid 19 levels when the lockdown was lifted on 11 Oct 2021, demonstrating the resilience of the mall.

Tenants adapting to the new norm

Management indicated that while luxury sales were still below pre-Covid 19 levels, it is well supported by domestic spending. Trade sectors like essentials, sportswear, casual wear, home equipment as well as jewellery and watches outperformed trade sectors like office and occasional wear due to work-from-home trends in 1QFY22. The increase in dine-in limit to 5 pax since 22 Nov 2021 has improved footfall and F&B players are now more savvy in managing the situation vs. 2020. Lease negotiations with tenants are now less challenging, despite the emergence of Omicron, as retailers adapt to the new norm. We understand that year-end 2021 tenant sales were encouraging.

Maintain Add with unchanged DDM-based TP of S$1.03

We expect rental pressure to ease this year as we see fewer Covid-19 restrictions in 2022 vs. 2021. Paragon is a prime beneficiary of Singapore setting up more vaccinated travel lanes as we move into the latter part of 2022. The REIT has one of the lowest gearing (30.3% as at 4QFY21) among the SREITs which gives it ample firing power for acquisitions. No distribution was declared this quarter as the REIT is now bound by the Singapore takeover code due to the possible chain offer by Cuscaden; without the report
of auditor and financial advisers/consent from SIC, the disclosure of unaudited profit figures (e.g. distribution) during the offer period could be deemed a profit forecast. Announcement for 1QFY22 distribution will be made later. Upside/downside risks include accretive acquisition/more Covid-19 restriction measures.