SPH REIT - CGS-CIMB Research 2019-11-08: Deepening Presence In Australia

SPH REIT (SGX:SK6U)

SPH REIT - Deepening Presence In Australia

SPH REIT is purchasing the largest mall in Adelaide, South Australia for S$636.5m, and will co-own it with Scentre Group.
The acquisition diversifies its income exposure and improves income stability.
Maintain HOLD with a higher Target Price.

SPH REIT (SGX:SK6U) is purchasing a 50% stake in the Westfield Marion Shopping Centre, Adelaide, South Australia, for a total consideration of S$636.5m (NPI yield of 5.6%) from Lendlease Real Estate Investments Limited. Including other transaction costs, the total acquisition cost will be A$188.2m. See SPH REIT Announcements; SPH REIT Latest News.
The acquisition is expected to be completed by end-2019. Scentre Group (largest Australian retail REIT) owns another 50% of the shopping centre and will be SPH REIT’s joint venture partner post completion of the acquisition.

Westfield Marion is the largest and only super regional shopping centre in South Australia with approximately 1.5m sf of gross lettable area. It is strategically located 10km southwest of Adelaide’s Central Business District.
Westfield Marion attracts 13.5m annual visitors and boasts high occupancy of 99.3% and WALE of 6.7 years by GLA, supported by a high-quality tenant base, including leading national retailers (63% of GLA).

The acquisition represents SPH REIT’s second asset in Australia following its first asset acquisition of Figtree Grove Shopping Centre in Dec 2018.
Post-acquisition, ~19.7% (versus 5.3% pre-acquisition) of SPH REIT’s portfolio by valuation will be derived from Australia.
Portfolio WALE will also improve from 3.2 years to 5.1 years, while contribution from top 10 tenants by income will decline from 19.3% to 15% with no more than 2.6% attributable to a single tenant which should enhance income stability.
More importantly, the majority of specialty tenant leases have fixed CPI-based rent reviews with an additional spread of 2% to 2.5% on average.

The acquisition will be financed through a combination of proceeds from the S$300m of perpetual securities (perp), debt and/or equity fund raising. Pro-forma DPU accretion would be 1.6% assuming acquisition to be funded from the perp, S$6.4m acquisition fee and equity funds of S$161.5m both at an issue price of S$1.04 per unit and the remaining with debt.
Gearing is expected to increase from 27.5% to 29.7%.

We raise our DPU forecasts by 0.7% to 1.6%, as we factor in the acquisition. See SPH REIT Dividend History.
Our DDM-based Target Price is increased to S$1.16 as we also increase our terminal growth. See SPH REIT Share Price; SPH REIT Target Price.
Upside risks include better-than-expected rental reversion and accretive acquisition; downside risks include weaker AU$ against S$.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-08

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.16 UP 1.110