SPH REIT - DBS Research 2018-05-02: Hopping Onto The Rail Mall, Can SPH REIT Do Magic Again?

SPH REIT SGX: SK6U

SPH REIT - Hopping Onto The Rail Mall, Can Sph Reit Do Magic Again?

Utilising balance sheet to acquire The Rail Mall, a retail strip along Upper Bukit Timah Road.
Good location but we see this as a value-add opportunity for the Manager to curate a retail mix to attract a wider catchment.
Short land lease tenure of 28 years could be a concern for some investors; but there is opportunity to redevelop the property in the longer term.
1.6% accretion to DPU; Target Price maintained at S$1.07.

SPH REIT announced the proposed acquisition of The Rail Mall for S$63.238m from Pulau Properties (Pte) Ltd, which is owned by the Lee Foundation, according to Media sources.
The Rail Mall is a retail strip, with about 360m of main road frontage along Upper Bukit Timah Road, comprising 43 single-storey shop units and 95 private carpark lots. One of the key access points to the Rail Corridor is located within a short walking distance from The Rail Mall.
The Mall’s NLA of close to 50,00 sqft has a leasehold tenure of 99 years starting from 18 March 1947 (28 years left).

Located close to a landed housing estate and with a long frontage, The Rail Mall has historically been seen as a convenience stop serving the immediate needs for households living in the vicinity.
We understand Cold Storage is an anchor tenant at the property and has been there for a fairly long time, along with a number of medical clinics, and food & beverage F&B) options. Under the ownership of SPH REIT, we believe that this is a value add opportunity for the Manager to work on improving the tenant mix in order to capture a wider catchment. With 95 parking lots, there is ample parking space at the Mall but in our view, lacks a pull factor for shoppers.
The Manager believes that the opportunity to raise income will be to strengthen the property’s F&B offering through a careful and well curated mix of F&B concepts and services. The Manager will also intensify community programs leveraging on the Rail Corridor to attract a wider catchment.

We understand that the property’s WALE is in line with the market average, implying that most of the leases should be turned over in the coming 2 years. Based on market data of rents in the Upper Bukit Timah vicinity of close to S$8psf per month, we estimate an initial yield of close to 6.5% on purchase price.
Assuming 100% debt funding at 2.8%, we estimate our FY19-20 DPU estimates will rise by 1.6% p.a.. Gearing is estimated to rise to 27% from 26%.

We note that the short lease tenure of 28 years could be too short for the manager to gain a decent return on capital on the property.
We however do note that the property sits on land that is zoned for residential use and the opportunity for redevelopment or potential strata-sale in the longer term could be an avenue to extract value. This is however not our base case scenario at this moment.
We maintain our BUY rating and S$1.07 Target Price.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | https://www.dbsvickers.com/ 2018-05-02

SGX Stock Analyst Report BUY Maintain BUY 1.070 Same 1.070