3 key points from SPH REIT's full-year 2020 earnings report

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The year 2020 has been a horrid one thus far for retail real estate investment trusts ( REITs ), with the Covid-19 pandemic forcing shutdowns and movement restrictions that have stretched many retailers financially.

Retail REITs will be hoping that the new year will bring about a change in fortunes and restore footfall in shopping malls to pre-pandemic levels.

Before we watch any fireworks at the turn of the year, the final earnings season of 2020 offers us a chance to take stock and analyze the damage 2020 has dealt and reflect on how to move forward.

For now, many retail REITs are still hunkering down and retaining distributable income for tenant support measures.

That brings us to SPH REIT.

The REIT has just released its full-year earnings for the fiscal year ended Aug 31, 2020 (FY2020), and here are three key points you should note.

Earnings up, but with caveats

SPH REIT announced net property income (NPI) of $181.9 million for the current fiscal year, inching up 1.2 per cent from the previous year’s $179.8 million.

But a closer look reveals that all is not as rosy as it seems.

If we were to exclude its new acquisition, Westfield Marion shopping centre, from the calculation, the REIT’s NPI would have fallen 13.5 per cent year on year to $155.6 million.

Westfield Marion, acquired by the REIT in December 2019, contributed $26.3 million to the NPI for FY2020.

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The downbeat results were naturally due to the Covid-19 pandemic, with the circuit breaker measures in Singapore as well as global travel restrictions contributing to an average year on year decline of 27.7 per cent in footfall at SPH REIT’s three Singapore-based properties.

The REIT also had to offer rental relief to tenants to the tune of $39.9 million across its five properties.

With the weak set of earnings, distribution per unit (DPU) for SPH REIT for the full year was $0.0272, a 51.4 per cent drop from $0.0514 in the previous financial year.

$0.0052 of its DPU was deferred to 2021 for cash flow prudence.

Based on its unit price of $0.84, SPH REIT’s distribution yield is 3.2 per cent currently.

Strong financial position

In terms of leverage, SPH REIT reported a gearing ratio of 30.5 per cent, safely below the MAS limit of 50 per cent.

The low gearing suggests that the REIT is still in a healthy position in terms of liquidity, plus it still has unsecured credit facilities of $225 million should it require cash urgently.

Another key metric for REITs is their weighted average lease expiry (WALE). This metric tells us whether the REIT’s rental income is locked in and secure for a long period of time.

For SPH REIT, the WALE by net lettable area (NLA) is a healthy-looking 5.3 years, but by gross rental income (GRI), it is much shorter at 2.6 years.

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Around 50 per cent of tenants by GRI have leases that will be expiring and up for renewal by FY2022, which could put pressure on the REIT to offer lower rental rates.

Although the REIT’s assets currently still have a high occupancy rate at 97.7 per cent, their rental negotiations with tenants will be keenly watched by investors.

At SPH REIT’s most valuable asset, The Paragon, 54 per cent of the leases by gross rental income will expire in both FY2021 and FY2022.

Over at Clementi Mall and Australia’s Figtree Grove, 20 per cent of their respective rental incomes are due to expire in FY2021. At Westfield Marion, slightly more than one-third of leases by GRI are due to expire by Aug 31 next year.

With the economic downturn and traditional brick-and-mortar retail not showing signs of a quick recovery, the REIT faces an uphill task in trying to maintain rental rates at current levels.

Negative rental revisions might very well lead to further drops in DPU.

Retail’s prospects

To date, we have witnessed major retail players departing Singapore, including Topshop, Esprit, and Sportslink.

In the short-term, consumer spending is expected to be depressed as consumers tighten their purse strings in this difficult economic environment.

A sharp plunge in tourism arrivals will also be a big blow to malls in Singapore’s prime shopping belts, including SPH REIT’s most valuable asset, The Paragon.

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The strong rise of e-commerce, accelerated by the pandemic, also threatens the prospects of brick-and-mortar retail stores.

But that is not to say that it is all doom and gloom for retail.

Like any industry, the winners will be those who can adapt to the new environment and satisfy the wants and needs of consumers.

A report commissioned by Frasers Centrepoint Trust identified six mega-trends that will define the future of retail.

They are: Localisation, Omnichannel, Experience, Connectivity, Health and Social Consciousness.

For retail REITs to thrive and prosper in the long-term, its management must act as a guiding hand, working alongside tenants to create a diversified, forward-thinking mix of brands that can adapt and capitalise on these mega-trends.

The pandemic will not last forever.

But, the real question is where shoppers will be spending their money once this is all over.

This article was first published in The Smart Investor. Disclosure: Herman Ng does not own shares in any of the companies mentioned.