SPH REIT (SGX: SK6U) owns two shopping malls in Singapore with a total net lettable area of around 900 thousand square feet that are worth $3.23 billion. As its name suggests, its sponsor is none other than Singapore Press Holdings Limited (SGX:T39). Being a relatively new REIT, it was spun-off from SPH to hold SPH’s real estate assets in July 2013. While its parent, SPH, is facing a bleak business outlook, SPH REIT has actually performed rather consistently over past few years.
Here are 7 things to know about SPH REIT before deciding whether to invest in it.
Ticker Symbol: SK6U
Market Capitalisation: S$2.56n
Sector: Real Estate Investment Trust
SPH REIT’s Assets
SPH REIT comprises 2 commercial properties: Paragon in Orchard Road and Clementi Mall located in Clementi.
Paragon Mall is an upscale retail mall with 711,339 sq ft of Net Lettable Area (NLA). It stands out among the Orchard Road malls as being synonymous with branded goods and luxury fashions such as Prada, Gucci, Chanel etc. Occupying a prime location in the heart of Orchard Road with a prominent façade, it is the destination of choice for local and foreign upmarket shoppers.
Paragon also houses Paragon Medical that has approximately 70 medical and dental specialist clinics and offices. Its target audience is the foreigners coming to Singapore for medical tourism, as well as Singaporeans seeking private medical treatments.
Clementi Mall is a five-storey retail podium with 192,498 sq ft of retail NLA. As a suburban mall, its target audience is primarily families and residents who usually shop for day-to-day products and groceries. It is also part of an integrated mixed-use development that houses two HDB residential blocks and a bus interchange. Clementi mall also linked to Clementi MRT Station via an overhead bridge.
With a broad overview of SPH REIT’s properties, let’s take a look at their key operating statistics.
Based on latest Q3 results, both malls are enjoying full occupancy as at 31 May 2017.
Source: SPH REIT FY 16 Annual Report
Among the retailer categories, Luxury Brands, Jewellery & Watches contribute the largest share of Gross Rental Income (28.1%), followed by Food & Beverage (14.9%) and Medical Suite/Office (15.1%).
Lease Renewal and Upward Revision
Source: SPH REIT Q3 FY17 Results Presentation
There were 27.6% of expired leases renewed in Q3 FY17s. On average, the leases were renewed at a higher rental of 3.7% above previous lease cycle. It is worth noting that Clementi mall managed to sign a big chunk of the new lease (80% of total NLA) at a higher rate.
Unique Quality of Assets
While there are only two retail malls under SPH REIT, it boasts an interesting portfolio each asset having their unique strength.
Paragon has a distinct positioning as a must-go destination for luxury fashion, designer goods and branded jewellery and watches among local shoppers and tourists. Mention paragon and the image of well-heeled shoppers carrying glossy shopping bags spotting luxury brand names spring to mind.
Concurrently, Paragon also has a major medical centre where many private doctor and specialists operate in. It is popular with foreigners who visit Singapore for medical tourism. This ensures a constant stream of visitors who couple their medical visits with shopping and dining in the seamlessly connected retail mall.
As for Clementi Mall, due to its location in the town centre and its integration with a bus interchange and MRT station, the footfall is consistently high. The two HDB blocks located above also provide a constant stream of shoppers to the F&B establishments and anchor tenants such as supermarkets and banks etc.
Consistent Occupancy and Rental Uplift
SPH REIT has maintained full occupancy across both properties since FY2014.
In FY2016, it achieved a rental reversion of 5.4%. The positive rental revision was also observed in Q3 FY17 as mentioned above.
Both metrics indicated that SPH REIT has good assets that are able to attract or retain tenants, and raise their rentals consistently.
Source: SPH REIT FY 16 Annual Report
Strong Balance Sheet
SPH REIT has a healthy balance sheet with low gearing. Based on its Q3 FY17 report, it has total liabilities of S$922m and total assets of S$3.31b, giving it a gearing ratio of 25.6%. It is relatively lower than other retail REITs with gearing ratio typically above 30%. This boost SPH REIT’s debt headroom should it needs to raise debt for acquisition or assets enhancements without incurring exceptionally high-interest charges.
Portfolio Asset Concentration
SPH REIT’s performance is heavily dependent on the prosperity of Paragon as it takes up 81.5% and 82.6% of the total revenue and net property income. Should Paragon suffer a drop in shoppers traffic which in turn affects its tenant sales and rentals, this could spell trouble for SPH REIT as a whole. While being a premier luxury shopping destination in Orchard Road helps, Paragon’s performance is also heavily tied to the overall appeal of Orchard Road as a vibrant shopping street. With the recent lacklustre sales figure of Great Singapore Sales, competition from suburban malls, and news on many vacant shop units in the area, Orchard Road’s outlook remains bleak at this juncture.
Performance of Tourism Industry
SPH REIT’s performance would also be affected by tourism industry slowdown, a regional macro factor that is beyond its sphere of control. While there is no breakdown of sales derived from foreign visitors, reduced number of tourists would lead to reduced tourist dollars, and sales of luxury brands in Paragon mall, which in turn affecting its rental.
Valuation and Major Shareholding
SPH REIT currently trades at a Price to Book ratio of 1.07 and a dividend yield of 5.5% based on FY16 dividend of 5.5c and closing price of $1.
Singapore Press Holdings has an effective stake of 70.38% of the total shareholdings via its subsidiaries that are also major shareholders: Times Properties Pte Ltd, SPH Holdings and SPH REIT Management Pte Ltd. The National Trade Union Congress also holds another 5.27% of the total shareholdings.
SPH’s latest financial results can be found in the link.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong does not own any companies mentioned above.
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