SPH REIT - DBS Research 2019-11-08: Acquires Adelaide’s Retail “Fortress” – The Westfield Marion

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SPH REIT (SGX:SK6U)

SPH REIT - Acquires Adelaide’s Retail “Fortress” – The Westfield Marion

• SPH REIT acquires Westfield Marion in Adelaide for 5.6% initial yield.
• A dominant mall with robust operating metrics serving a large catchment area implies income sustainability.
• Diversifies portfolio earnings; accretive deal with a potential 1.6% accretion even with assumed S$161.5m in new equity.
• Estimates not adjusted yet pending deal and funding structure finalisation.

Westfield Marion is a “fortress” in Adelaide.

• SPH REIT (SGX:SK6U) announced the acquisition of a 50% stake in Westfield Marion along Diagonal Road, Adelaide for A$670m (c.S$636.5m) from a fund (Australian Prime Property Fund – Retail) which is managed by Lendlease Real Estate. The mall is South Australia’s largest shopping centre spanning c.1.5m sqft across a three-storey retail mall, with five storeys of office space and c.5,270 shopping spaces. See SPH REIT Announcements; SPH REIT Latest News.
• Westfield Marion is considered a super-regional shopping centre in South Australia given its large operational footprint and wide catchment of c.497,000 residents spread out over 15km. The mall enjoys good visibility and infrastructure, enabling good accessibility to the mall for shoppers.
• The Marion trade area, where the mall has favourable metrics with average per capital income and household income which are higher than the Greater Adelaide. (hanging sentence) Population and spending growth within the total trade area (“TTA”) is projected to post c.0.8% and 3.6% CAGR over the next 15 years, which in our view, supports demand for retail space from tenants who want to relocate there.
• In the longer term, with supportive government-led initiatives such as the investment into the Australian Space Agency located in Adelaide and A$3.8bn invested in BioMed City project within the Adelaide Central Business District, (“CBD”) will over time, bring more highly skilled jobs to Adelaide. This, in our view, points to stronger retail spending power in the longer term, and thus upside to Westfield Marion’s performance in the long run.

A “destination” mall with strong catchment and diversified tenancy profile.

• Westfield Marion is located next to Oaklands train station connecting it to Adelaide CBD and has a diversified tenant base anchored by major department stores (David Jones, Myer and Harris Scarfe), supermarkets (Aldi, Coles and Woolsworth) and three discount department stores (DDS) – Big W, Kmart and Target and a range of mini-anchors and specialty tenants.
• The mall has a long weighted average lease expiry (WALE) of 4.2 years with a majority of its majors and mini-majors having WALEs in excess of 10.6 years and 3.5 years respectively. We do note that there is close to c.30% of its leases up for renewal in year 1 that is rolling off, where the manager is actively looking to engage tenants to forward renew some of the leases.
• That said, given the mall’s reportedly dominant position within South Australia, we believe that most tenants will likely want to continue to have an operating presence there and the landlords (Scentre and SPH REIT) will likely have the upper hand in such negotiations going forward. According to Scentre, the total retail spend per capita for the Westfield Marion Total Trade Area is estimated at A$13,978 per annum in 2018, which is 3% above the Adelaide Metro average (A$13,534).

Infuses asset and tenant diversity

• The acquisition of Westfield Marion will further diversify SPH REIT’s income diversity and bring its Australian exposure to 19.7% (vs 5.3% currently). While we remain very comfortable with its key asset Paragon in terms of its income contribution and operational metrics, we believe that this acquisition will further boost growth and earnings visibility as its portfolio’s WALE increases from 3.2 years to 5.1 years. 
• Most of the specialty tenant leases have a CPI of 2.0-2.5% escalations which provide an inbuilt organic growth momentum for the REIT in the longer term. This, in the process, reduces its tenant concentration with top 10 tenants contributing only 15% (from 19.3%) of income.

Purchase at 1.4% discount to appraised value; estimated 10% discount to last valuation, initial yield of c.5.6%.

• The purchase consideration of A$670m is understood to be at a 1.4% discount to the latest appraised valuation of A$679.5m and at a c.10% discount to the reported A$737.5m book valuation of the 50% interest held by co-owner Scentre Group back in December 2018. The all-in cost of the deal is estimated to be c.A$691.3m. The initial yield is estimated to be c.5.6%; which is higher than the implied yield of 5.0% that SPH REIT is trading at. See SPH REIT Dividend History.
• The manager intends to use proceeds from the recent S$300m perpetual securities for this acquisition and might look to tap the equity markets for capital. That said, SPH REIT has ample debt capacity and lines to fully debt fund the remaining c.S$400m to fully fund this purchase.
• Based on our estimates, assuming
  1. S$300m in proceeds from the recent perpetual securities, and
  2. 161.5m new equity (155.3m units @ S$1.04/unit), remaining from debt,
  the manager expects DPU accretion of 1.6% for this deal and an NAV accretion of 0.4%.
• In our previous estimates, we have assumed a S$500m acquisition in our models and will tweak it upon the finalisation of the funding structure. See SPH REIT Share Price; SPH REIT Target Price.

Derek TAN DBS Group Research | https://www.dbsvickers.com/ 2019-11-08

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