Many shareholders of SPH REIT have lamented over the lack of M&A for expansion. Ever since its maiden IPO, SPH REIT only had Paragon and The Clementi Mall in its portfolio. During the last AGM held on November 30, 2018, the question of why only a tiny strip of Mall, namely, The Rail Mall was acquired during the current financial year was raised. The answers given as per below screenshot on the usual rhetoric response that the asset acquired must be good quality, well located with a minimum 6% yield similar to the existing 2 malls. You can imagine the disappointment of all shareholders (including myself) that SPH REIT still has no fate to be together with The Seletar Mall that SPH is still keeping in its stable ever since its official opening in November 28, 2014.
Why is everyone so looking forward to The Seletar Mall joining SPH REIT?
As a suburban mall located in the heart of Sengkang West, it is expected to enhance the REIT’s resiliency in earnings even during an economic downturn. Currently, Paragon forms the main bulk of the earnings contribution. The Seletar Mall is expected to cost S$500Mil and will boost the earnings significantly from suburban shopping. NTUC Finest and Shaw Theatres are the current major anchor tenants. The hotpot chain Hai Di Lao also has a new branch opened in 2018 there that sees super long queues during lunch and dinner time during the weekend.
Other retail chains such as Uniqlo and BHG are also tenants that have been there for many years since its official opening in November 2014. Other F&B tenants include Mc Donald, Starbucks, Burger King, Song Fa Ba Kut Teh. There are also many education centres such as the Learning Lab located at The Seletar Mall.
|Picture of The Seletar Mall at Sengkang West|
|The interior layout which is unique and have natural lightings from the roof pouring into the Mall.|
Many analysts have been saying that The Seletar Mall will be up for sales to SPH REIT since 2016 but it has not materialized.
A surprised announcement of another acquisition- purchase of freehold Australian Mall
The big surprise came on Dec 18, 2018, just 2 weeks after SPH REIT mentioned that they are mulling over acquisitions which have been tough to fulfill based on their stringent checklist. SPH REIT announced that they have signed an agreement to acquire Figtree Grove Shopping Centre from Swordfish Australian Mid TC Pty Ltd for approximately A$210 Mil.
Figtree Grove Shopping Centre is located about 3.7 km southwest of the Wollongong and 71 km southwest of Sydney. It occupies a total gross lettable area of 21,984 sqm, including facilities like a 24-hour Kmart, supermarkets, retailers and dining options. It sits on a freehold land area of 50,900 sqm.
The proposed acquisition will be made through Figtree Holding Trust, a wholly owned sub-trust of a joint venture between SPH Reit and entities managed by Moelis Australia, an ASX-listed financial services group. SPH REIT and Moelis Australia Asset Management will pay A$175.1Mil and A$30.9 Mil for a stake of 85% and 15% respectively.
This bodes well for SPH REIT through working on a partnership with Moelis which is brokering the deal with the giant private equity fund Blackstone and providing local networking support. It also allows SPH REIT management team to get invaluable management exposure of shopping mall in Australia and pave the way for more Australian acquisitions in future pipelines. It also diversifies the geographical risk of portfolios based only in Singapore.
Current SPH REIT valuation using Dividend Discounted Model
The Dividend Discount Model (“DDM” is a method of valuing a company’s stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. Since REITS payout more than 90% of its earnings as dividends, DDM will be a useful tool for us to do some mathematical valuation to see the fair value per unit expected.
P = D1 / (r -g)
P= Current Price based on summation of the infinite series;
D1= Dividend Payment per unit (S$0.055) for 1 year;
r= Cost of Equity (assume 5.5% based on 21st Dec 2018 closing price);
g= Dividend Growth Rate-Assume zero to be conservative.
From the above assumption, the valuation of SPH REIT is at S$1.00 per unit. The current price as at December 21, 2018 thus does not seem to have fully priced in the upcoming Australian acquisition and also the potential future acquisition of Seletar Mall. Further long term price catalyst includes the new Woodleigh shopping mall that SPH is developing with Kajima at Bidadari.
Please also see my previous article on the new shopping malls driving the Growth Engines for SPH REIT.