Healthy metrics; on recovery path; Prefer FCT

SPHREIT’s portfolio occupancy at 98.8% in 1Q22 was stable QoQ and rose YoY from 97.9%, underpinned by higher occupancy at its Singapore assets and recovering tenant sales, while its WALE remains healthy at 5.5/2.9 years by NLA/gross rental income. The REIT is bound by a chain offer, resulting from its sponsor’s ongoing M&A exercise and as such DPU was not disclosed. We see improving performance into FY22, and maintain our forecasts and DDM-based TP of SGD0.95 (COE: 7.2%, LTG: 1.5%). Stay at HOLD. Risks are on the upside given acquisition catalyst, but deal visibility remains low as the sponsor’s restructuring is underway. We prefer FCT (FCT SP, BUY, TP SGD2.90) for its concentrated suburban mall portfolio.

Occupancy of Singapore assets rose to 99.8%

Occupancy for its Singapore assets rose to 99.8% in 1Q22 (from 98.9% in FY21), due to higher occupancy at Paragon at 99.7% (from 99.1%) and Rail Mall at 100% (from 92.2%), while it was maintained for Clementi Mall at 99.9%. Tenant sales in 1Q22 (at Paragon and Clementi Mall) were at 97% of 1Q21, despite a 6-week dining-in restriction (capped at 2 pax per table, vs 5 pax in 1Q21). At Clementi Mall, tenant sales rose 5% YoY and returned to close to pre-Covid levels, due to a stronger tenant mix (new F&B concepts, Decathlon). Easing measures should support recovery, but rental reversions are likely to remain soft.

Occupancy of Australia assets resilient, may improve

Occupancy at Westfield Marion was maintained at 99.1% in 1Q22, underpinned by the mall’s dominant position in Adelaide, while its tenant sales rose 6% YoY in 1Q22. Occupancy at Figtree Grove dipped slightly to 98.2% in 1Q22 (from 98.8%) as New South Wales had a c.3.5-month lockdown, which was eased on 11 Oct 2021. Tenant sales for Nov 2021 recovered to close to pre-Covid levels, and we expect better fundamentals in FY22, backed by resilient occupancies.

Conservative B/S, but low acquisition visibility

SPHREIT’s balance sheet remains conservative with gearing estimated at c.30%, and debt headroom of SGD1.1b (at 45% limit). Trading liquidity has improved following its FTSE EPRA NAREIT Global Developed Index inclusion, as daily traded volume averaged 4.6m shares in 1Q22 (from 1.6m in FY21). We think the sponsor’s Seletar Mall will likely be prioritised on acquisitions, and estimate that a fully-debt funded deal for the SGD480m asset could add c.8% to our FY22 estimates. However, we think inorganic growth could take a back-seat to potential restructuring of the sponsor.