SINGAPORE (May 3): DBS is maintaining its “buy” call on SPH REIT with a target price of $1.07.
On Apr 30, SPH REIT announced that it will be acquiring The Rail Mall from Pulau Properties for a consideration of $63.2 million.
See: SPH REIT acquires The Rail Mall for $63.2 million
Rail Mall is located close to landed housing estates and has historically been seen as a convenience stop serving the immediate needs for households living in the vicinity.
One of Rail Mall’s anchor tenant is Cold Storage, which has been there for a fairly long time, along with several medical clinics, and food and beverage options.
In a Wednesday report, analyst Derek Tan says, “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.”
The retail strip comprises 43 single-storey shop units and 95 private carpark lots, which the analyst believes is ample parking space, but lacks a pull factor for shoppers.
The manager plans to raise income by strengthening the property’s F&B offering through a careful and well curated mix of F&B concepts and services, while also intensifying community programmes that leverages on the Rail Corridor to attract a wider catchment.
Rail Mall’s weighted average lease expiry (WALE) is in line with the market average, implying that most of the leases should be turned over in the coming two years.
“Based on market data of rents in the Upper Bukit Timah vicinity of close to $8 psf per month, we estimate an initial yield of close to 6.5% on purchase price,” says Tan.
And assuming 100% debt funding at 2.8%, the analyst estimates FY19-20 DPU will rise by 1.6% per annum, while gearing is estimated to rise to 27% from 26%.
However, 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,” says Tan.
As at 10.50am, units in SPH REIT are trading at $1.00 or 19.7 times FY18 earnings with a distribution yield of 5.6%.
