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

SPH REIT - DBS Vickers 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.

What’s New

  • 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).

Our thoughts and impact on earnings.

Opportunity for Manager to add value.

  • 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.

Accretive deal; funded 100% by debt.

  • 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%.

Short land lease tenure a concern.

  • 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