SPH REIT's Q2 results get boost from Australia buy

It bought 85% of Figtree Grove Shopping Centre at a post-cost yield of 5.7%.

Singapore Press Holdings Real Estate Investment Trust’s (SPH REIT) growth is expected to be boosted by its acquisitions, following its Singapore and Australia buys, according to a report by DBS Equity Research.

The REIT ventured into Australia through the acquisition of an 85% stake in Figtree Grove Shopping Centre, located in Wollongong, that was acquired at a post-cost yield of 5.7%. The mall is said to offer defensive attributes with a high occupancy rate of 98.5%, and a long weighted average lease expiry (WALE) of 5.4 years (by income) and 7.8 years (GLA). 

The high certainty in income drives upward trajectory in distributions for the REIT, DBS analysts Carmen Tay and Derek Tan said. 

“SPH REIT trades at an average 3.3% spread against the 10-year bond compared to the 3.5% spread that its retail peers trade at. The difference can be attributed to the quality asset portfolio, coupled with visibility offered from a fairly concentrated portfolio of well-located dominant malls in their respective submarkets,” they explained.

With a concentrated portfolio consisting of only four malls, of which approximately 70% of revenue is derived from Paragon, SPH REIT’s distributions are highly dependent on the operational outlook for the Paragon, the report noted. 

According to Tay and Tan, the rental performance of SPH REIT’s Paragon and The Clementi Mall properties is a good representation of investor’s perception and confidence in the direction of the Singapore retail market. “Singapore retail sales and SPH REIT’s rental reversion rates are in turn strongly correlated, which can be explained by the greater willingness for merchants to renew their tenancies at a higher rent once they have observed positive retail momentum in the previous rental cycle,” they highlighted. 

SPH REIT’s Q2 2019 revenues climbed 8.5% YoY to $58.1m, mainly on higher rental income from Paragon and Clementi Mall, coupled with incremental contributions from its recently completed acquisition from the Rail Mall and Figtree Grove in Australia, according to its financial statement. 

“Stripping out the impact from acquisitions, top line would have been flattish,” Tay and Tan noted. 

Also read: SPH REIT's NPI up 8.5% to $45.86m in Q2

Meanwhile, its net property income (NPI) also edged up 8.5% to $45.86m from $42.27m. Coupled with slight increases in management fees and interest costs, distributable income came in 2.5% higher YoY at $37m. After retaining 2.5% of distributable income in Q 2019, income to be distributed inched up 1.4% YoY to $36.4m, translating into a distribution per unit (DPU) of 1.41 cents. 

Whilst the market’s reaction to SPH REIT’s acquisition of The Rail Mall was fairly mixed, Tay and Tan noted that the asset’s location and access to an affluent catchment population provide a value-added opportunity for the firm. 

The report highlighted that food and beverage (F&B) tenants make up roughly 40% of net lettable area (NLA), excluding the supermarket, which occupies an estimated 25% of NLA. 

“Efforts are underway to enhance the mall’s positioning as a F&B destination, including close collaboration with tenants to differentiate existing offerings and plans to implement a series of engagement programmes to drive traffic. Further, with approximately 80% of leases due for renewal over FY19-20F, this enables SPH REIT to further optimise tenant mix, if feasible, and capitalise on the improving rental reversionary outlook,” Tay and Tan noted.

The analysts also added that with a healthy gearing of below 30% and cost of debt of less than 3%, SPH REIT is well poised for further debt-funded acquisitions. 

The next growth catalyst for the REIT will be the acquisition of The Seletar Mall, which was acquired by Singapore Press Holdings (SPH) in December 2014. SPH reportedly has a 70% stake in the asset. 

“If this materialises, assuming the acquisition cost of The Seletar Mall is $500m and equity/debt funding split of 30%/70%, we estimate that this could lift DPU by around 5%. The REIT is also on the lookout for further yield-accretive opportunities within the Asia Pacific region, particularly Australia,” Tay and Tan noted.