SPH REIT - CGS-CIMB 2018-05-01: Buys The Rail Mall

SPH REIT - CGS-CIMB 2018-05-01: Buys The Rail Mall SPH REIT SK6U.SI

SPH REIT - Buys The Rail Mall

  • SPH REIT acquires The Rail Mall for S$63.2m.
  • Purchase to be funded by debt, gearing remains low post transaction.
  • New asset makes up c.2% of enlarged AUM.
  • In the medium term, ability to optimise tenant mix could boost rental returns.
  • Maintain HOLD with a slightly higher Target Price of S$1.07.

Buys The Rail Mall

  • SPHREIT announced that it has purchased The Rail Mall, its maiden acquisition post listing. The property is a retail strip with 43 single-storey shop units and 95 carparks located along Bukit Timah Rd. It is well served by the Hillview MRT station and is accessible to major highways. One of the key access points to the Rail Corridor is located within a short walking distance to the mall. 
  • The property has an NLA of 50,000sqft and sits on a site with a remaining land lease of 28 years.

New acquisition to make up c.2% of expanded portfolio AUM

  • The total consideration of S$65.9m comprises the purchase price of S$63.238m and other transaction-related costs. The acquisition price is slightly higher than the independent valuation of S$62.9m, which is derived using discounted cashflow and capitalisation method. 
  • Post completion of acquisition in June 18, the property is expected to account for just under 2% of SPHREIT’s expanded AUM.

To be funded by debt, accretive to bottomline

  • Given the short underlying land lease, we believe investors should evaluate this transaction from a cashflow perspective. The purchase will be funded by internal resources and debt. 
  • Given the low debt funding cost, the deal is anticipated to be accretive to bottomline. In the longer run, a well-curated mix of F&B and services offerings could further strengthen the retail offerings in this property and potentially improve rental returns.

Gearing level still low post acquisition

  • Assuming fully funded by debt, this acquisition should increase the trust’s gearing ratio from 25.4% at end-Feb 18 to c.27.3%, still amongst the lowest within the S-REIT sphere. This provides more debt headroom for any future acquisitions.

Maintain HOLD

  • We raise our FY19-20F DPU estimates by c.1% to account for the new contributions from this purchase. Accordingly, our DDM-based Target Price is raised slightly to S$1.07. Maintain HOLD. 
  • SPHREIT offers investors 5.6-5.8% FY18-19F dividend yield. 
  • Upside risk include ability to extract more returns from this new purchase and more new acquisitions. 
  • Downside risk include protracted downturn in the retail sector which would drag on rental growth.

LOCK Mun Yee CGS-CIMB | YEO Zhi Bin CGS-CIMB | http://research.itradecimb.com/ 2018-05-01
SGX Stock Analyst Report HOLD Maintain HOLD 1.07 Up 1.060