Positioning for SPH Reit

Wandering_Warrior_Tan

Contributed by Warriortan

Starting from  next week, Singapore listed companies will start to report their quarterly results. As usual, the first to go is SPH Reit (as they ended their financial quarter in Feb). Among with it are companies like SPH and Soilbuild Business Space Reit.

In this week’s blog, I will share my learning, thoughts and investment positioning for SPH Reit, which is currently my 3rd largest investment, occupying 3.6% in terms of value in my active portfolio.

SPH-REIT-Logo

First, a short introduction around SPH Reit.

SPH REIT is established principally to invest, directly or indirectly, in a portfolio of income-producing real estate which is used primarily for retail purposes in Asia-Pacific, It was listed on the Singapore Exchange Securities Trading Limited
(“SGX-ST”) on 24 July 2013 and is sponsored by Singapore Press Holdings Limited. It comprises two high quality and well located commercial properties in Singapore totalling 903,837 sq ft Net Lettable Area(“NLA”) with an aggregate appraised
value of S$3.23 billion. The portfolio consists of Paragon and The Clementi Mall.

static_historical_line_1y_mini
SPH REIT share price in the last one year

 

Second, a snapshot of its performance in the last 2 years and the important financial ratios

SPHFinancials

I invest in SPH Reit mainly for income purpose

It has been providing me with an average of 5.5% dividend yield consistently in the last few years. I am happy with it as I feel that I am adequately compensated for the risk that I take on with my investment.

SPH Reit is a major part of my portfolio because

… it has met all my criteria for a Long Term Substantial Income Reit investment. I listed these criteria in order of priority below

images

  • It is in a business that I feel I can understand
  • Has a Market Cap > 1000 Mln S$
  • Pays dividends every year (for Income, will be different for growth stocks)
  • Has a Dividend yield that is > 5.0% (for Reits, else can be lower)
  • It’s Gearing ratio is < 40% (for Reits only)
  • It does not use innovative financial engineering to boost yield
  • It is liquid on the stock exchange; I can get in and out easily
  • The Major shareholders do not marginalize the minority shareholders

The attractions of SPH Reit

… to me over other similar companies/Reits are:

pre-paid-interest-picture(a) It has been returning an average yield of 5.5% to me over the last few years. The highest price I bought SPH Reit shares was 96.5 cents while the lowest price was 92 cents. My weighted average purchased price was 94 cents. Last year dividend distribution was 5.5 cents per year. Assuming that in an economic downturn, its distribution will come off by 10%, its yield is still > 5.0% to me.

(b) SPH Reits have 2 excellent assets. Although it may run the risk of having its profitability overly concentrated on just 2 assets, my personal view is that these are excellent assets that are strategic located and have a competitive advantage over the rest. They have been 100% occupied from The very first day that the company was formed and I don’t foresee the occupancy rate dropping anytime soon unless there is a catastrophic event. For those you who are alumni of NUS, Singapore Poly, Ngee Ann Poly or SIM , I am sure you have fond memory of the vibrancy in and around the Clementi town. Clementi Mall is now right in the Centre of it. Paragon has its own unique attraction being right in the centre of Orchard Road. Its ability to innovate itself over the years has been amazing. No doubt, the popularity and future growth of ecommerce will threaten them; I do feel that well run and strategically located shopping malls will still have their attractiveness to tourists, couples and families looking for a comfortable place to chill out.

SPH-REIT-Paragon

ST_20160106_KPREIT06_1965223

(c) The management has been running the business conservatively. Not necessarily a good thing but at the very least, it does not seek new asset just for the sake of fueling revenue growth and getting bigger in assets and becoming highly geared. It is well known in the Reits world that a growing Reit will benefit the Manager the most because its chargeable fees to the company are based on both the value of the assets under management and the service of scanning for and acquiring new assets. The Manager is normally a subsidiary of the sponsor or the biggest shareholder. Therefore, while they will benefit from all these activities, the rest of the (minorities) shareholders may not. SPH Reit has not done that so far.

Gearing(d) Gearing is low at 26%, the lowest of all the Reits on the Singapore Exchange. It reflects the conservatism in the manner the business is run. While there is probably merit to increase the gearing to increase the income and thus return on equity for greater shareholder value, it is better to stay put if it cannot identify any attractive asset to acquire. Furthermore, the average interest rate on its loans is relatively low (at 2.6%). It is probably a reflection of the confidence that the banks have with them. They have not seek any equity financing from the shareholders, meaning we didn’t have to fork out more money to maintain our shareholding in the company. If it can continue to make the assets work very well and deliver the 5.5% dividend yield, then that is good enough for me.

(e) It has been rumoured for a while that SPH is likely to inject its Seletar Mall into SPH Reit. However, no action has been taken yet. It is probably because the manager does not feel that the income streams from Seletar Mall is stable and mature enough. The good thing is that they don’t seem to be “pushed” to do so. The market does feel that this should be a useful asset to acquire so there is a certain level of expectation but as in all asset purchases, it is only so if it can be purchased at the right price.

The_Seletar_Mall
A picture of Seletar Mall … will it be the 3rd asset for SPH Reit?






(f) SPH remains a significant shareholder of the company. It owns 70% of SPH Reit. The other substantial shareholder is NTUC which owns 5%. Having such a substantial shareholder will increase the likelihood that the company will run its business in the best interests of its shareholders. So far, SPH has been treating the minority shareholders relatively well.

(g) Its Net Asset Value per share is almost on par with its share price. It is 94 cents per unit. In other words, if the SPH Reit is to sell away all its assets today, as a shareholder, I should be able to get back almost the same amount of money that I have invested in. Though valuation has a big “IF”, it is still a useful assuring knowledge to me.

invest_yourself

So, the ultimate question you may ask now:

Is SPH Reit an attractive investment at the current price level of 98 cents?

(Remember: A good company is only a good investment if you buy it at the right price)

  • First, do you think SPH Reit fit in your investment objective? It is obviously a conservative “income” stock and not a “growth” stock.
  • If yes, then based on the historical distribution of 5.5 cents per year, at 98 cents, its dividend yield is 5.6%. Is this good enough for you?
  • Assuming that its dividend yield will drop by 10% in a market downturn, is 5% dividend yield still acceptable to you?
  • Do you feel comfortable knowing that it is exposed to high “concentration” and growing “e-commerce” risk?

If your answers to all of the above are YES, you may want to consider adding a SPH REIT position to your portfolio.

For me, I will add more only if the price falls below 95 cents. The reason for my conservatism is because I am already “heavily” vested in it so I have an additional consideration on whether I like to increase my exposure further or diversify my exposure elsewhere.

downloadI am looking forward to coming Monday (10/4/2017) to know how well (or how badly) it has performed in the last quarter and whether the 2 risks that were mentioned above have started to pose a threat to its recurring income. Maybe we will get a surprise – a Seletar Mall asset injection into the Reit. Some people say it is either now or never because the new cycle of rental renewal and the opportunity to re-jig the retail positioning and select the right shops is only available in the coming year.

Well, I am definitely eagerly waiting their declaration of another quarter of $13.75 per 1000 shares of passive income cash inflow into my bank. Anything less than will be a disappointment to me.

I hope this article is helpful to you in some way.

P.S Results release on 10 April 2017 as follows:

(a) Financials: SPHReitA

(b) Powerpoint slides: SPHReitB

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