A Second, More Sizeable Australian Deal

• SPH REIT (SGX:SK6U) has signalled a clearer overseas growth ambition with its second Australian acquisition that should boost its AUM by 17% to SGD4.2b. The destination mall offers DPU visibility and a foothold for further deals.
• The transaction, priced at a 5.6% NPI yield and discount to valuations however reflects market retail tailwinds, even as the earlier SGD300m perps issuance has proven timely, with DPU accretion at +1.6%.
• We keep our forecasts unchanged pending deal closure (end-2019) and funding clarity. HOLD with SGD1.10 DDM-based Target Price (COE 6.6%, LTG 1.5%). See SPH REIT Share Price; SPH REIT Target Price.

Acquires 50% of Adelaide’s Largest Mall

• SPH REIT will acquire from ASX-listed Lendlease (LLC AU) its 50% stake in Westfield Marion for AUD670.0m (SGD636.5m).
• The freehold property, with a 1.5m gross lettable area (GLA), is Adelaide’s largest and only super-regional shopping centre in South Australia. It boasts 99.3% occupancy and a high 13.5m annual footfall, which are backed by its 327-strong tenancies and anchored by the largest national supermarkets, department stores, and a 26-screen cinema. See SPH REIT Announcements; SPH REIT Latest News.
• Rental reversions will have to be watched as discussions are underway for its leases (30% of total GLA) expiring in year-1, according to management.

Deal Deepens Market Presence, Is Accretive

• Its AUM from Australian properties will rise from 5.3% to 19.7% post-deal, while the mall’s 6.7-year WALE (by GLA) and 4.2 years by income should lengthen its portfolio WALE from 3.2 to 5.1 years (by NLA). DPU visibility is supported by favourable lease structures - majority of specialty tenant leases are embedded with pa rental escalations at CPI plus an additional 2.0-2.5% spread.
• Management sees a 1.6%/ 0.4% DPU/ NAV accretion on their proposed funding, supported by the 4.1%, SGD300m in perpetuals issued in Aug and indicative SGD162m equity fund raising (at SGD1.04). See SPH REIT Dividend History.
• Gearing should remain at a conservative 29.7% post-deal (from 27.5%).

Pricing Reflects Retail Sector Challenges

• The purchase is priced at a 1.4% discount to valuation, implying a 5.6% NPI yield. However it is also 9.1% below the AUD737.5m valuation for the remaining 50% interest held by Scentre (SCG AU) as of end-Dec 2018, while its cap rate has softened by 50bp from 5.13%.

Source: Maybank Kim Eng Research - 11 Nov 2019