SPH REIT - Buying Figtree Grove in Australia

Date: 16/12/2018

Source  :  CIMB
Stock  :  SPHREIT       Price Target  :  1.02      |      Price Call  :  HOLD
        Last Price  :  1.08      |      Upside/Downside  :  -0.06 (5.56%)

  • SPH REIT plans to acquire an 85% stake in Figtree Grove, a sub-regional shopping centre in Australia.
  • The purchase is to be funded by a combination of debt and internal funds. It is expected to be DPU accretive.
  • We raise our FY19-21F DPU by 0.5-0.8%. Maintain HOLD with a slightly higher DDM-based target price.

Proposed Acquisition in Australia, First Overseas Foray

  • SPH REIT has proposed the acquisition of an 85% stake in Figtree Grove Shopping Centre in Wollongong, Australia, for a total consideration of A$175.1m. Including other transaction costs, the total acquisition cost will be A$188.2m.
  • Its JV partner, Moelis Australia Asset Management, whose investments include real estate, credit, private equity and venture capital and which is a unit of ASX-listed Moelis Australia, will hold the remaining 15% stake in the property.

Purchasing a Resilient Sub-regional Shopping Centre

  • The property is an established sub-regional centre and has a gross lettable area (GLA) of 21,984 sqm. Anchored by a 24-hour Kmart, Coles and Woolworths supermarkets, 2 mini-majors, with 72 specialty stores and 2 external tenancies, it focuses mainly on non-discretionary shopping.
  • Figtree Grove Shopping Centre serves a total trade area of ~207k residents and has achieved 47.7% above the retail sales benchmark for malls in the same category. It is 98.5% occupied and has a well-staggered lease expiry profile with a WALE of 7.8 years by GFA. As such, it should provide a steady and resilient stream of income to SPH REIT.

A DPU-accretive Acquisition

  • The asset is expected to generate a net property income yield of ~5.3% after taking into account the total acquisition cost. The proposed acquisition is expected to be DPU-accretive and comes with a gross rental guarantee of A$800k for all vacant and terminating tenancies in the first year of acquisition.
  • Post completion of the acquisition by the end of this week, the property is expected to provide SPH REIT with an approx. 5.2% exposure by asset value to Australia.

To be Funded by a Combination of Debt and Internal Funds

  • SPH REIT intends to finance the acquisition through a combination of debt and internal sources. Its gearing ratio is expected to increase to 30.1% after the completion of the exercise from 26.3% as at end-Aug 2018.
  • At a 30% gearing level, it is still among the lowest within the S-REIT sphere. This gives it room to acquire more assets in the future.

Maintain HOLD

  • We lift our FY19-21F DPU By 0.5-0.8% to factor in the acquisition, assuming 95% debt funding. As such, our DDM-based Target Price is raised slightly to S$1.02.
  • Maintain HOLD.
  • Upside accretive acquisitions Downside risk: slower-than-expected rental growth.

Source: CGS-CIMB Research - 16 Dec 2018

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