Thursday, 11 July 2013

SPH Reit preview



SPH REIT ("SPH REIT" or the "Company") lodged its preliminary prospectus with MAS. The draft prospectus is here. SPH is offering 83.982m units for the public offering and 224.902m for the placement tranche. The price for book building is from $0.85 to $0.90. There will be an over-allotment option of up to 55.988m units. The market cap will be around $3.101 billion.

According to the term sheet i received from my broker, the tentative time table is as follows:
Institutional book building: 10-16 July
Pricing and allocation: 17 July pm
Singapore public offer: 17-22 July (12pm)
Listing: 24 July 
The joint book runners are OCBC, Credit Suisee and DBS.

Principal business

Invest in a portfolio of income producing retail properties in Asia Pacific.

Initial Portfolio


1. A 99-year leasehold property in Paragon Mall. (note that the property is actually freehold but after 99 years, the ownership will revert back to SPH). The lease will commence on the listing date.


2. A 99-year leasehold property in Clementi Mall. The lease commenced on 31 Aug 2010.

Further details as follow:


Financial Projection


Distribution yield

The first distribution will be for the period from Listing Date to 30 Nov 2013 and thereafter on a quarterly basis. The quarterly dates are as of 31 Aug, 30 Nov, 28 Feb and 31 May.


Shareholders & Cornerstone investors


The cornerstone investors will hold 10% and they are:
  1. Great Eastern Life Assurance Company
  2. Hong Leong Asset Management Bhd
  3. Morgan Stanley Investment Management Company
  4. Newton INvestment Management
  5. Norges Bank
Nothing unusual or to shout about and they have no "lock-ups" anyway. I would have preferred to see more insurance companies as they will want the yield to meet policies liabilities (which are pretty paltry) anyway. 

What i like about SPH REIT

  • The chance to own Paragon, one of the more "iconic" building on Orchard Road in a great location.
  • Assuming all the over-allotment is taken up, SPH still retains a 70% interest in the SPH REIT, which means interest is "more aligned" 
  • Income support arrangement by Vendor for Clementi Mall. There will be a top up arrangement if income drops below $31m per annum subject to earlier of 5 years or a cap of $20m.
  • It's a simple REIT structure
My Concerns
  • 100% occupancy. What more can you get unless the plot ratio is increased or they do some funky Assets Enhancement?
  • Selling at a slight premium to NAV (in return for the income support i supposed) 
  • Relatively "less attractive" yields.
Peer valuation

The table below was prepared by JP Morgan. I wonder why Starhill REIT was excluded from the comparison listing below?  Maybe it is more diversified than SPH REIT.


I will compare this to CapitaMall trust and Starhill Global. As of today, based on Capital IQ, Starhill Global is trading at around 6.5% and at a price to book of 0.94x while CapitaMall is trading at 5.05% and a premium PB of 1.2x. If based on the above logic, investors in CapitaMall and SPH REIT should switch out to Starhill Global. ^_^

Assuming it trades within the valuation metrics implied by Starhill and Capitamall, the SPH REIT trading range will be:
between $0.77 to $0.99 (based on the yield of between 5% to 6.5%) and 
between $0.85 to $1.08 based on price to book of between 0.94x to 1.2x.

My Fair Value

Assuming a yield of 5.5% to 6% and a price to book of between 1.0x to 1.1x, the trading range of SPH REIT will probably be between 82 cents and 99 cents

I will finalize my Chilli ratings after the pricing is finalized and it will also depend on how the other REITs performed in the next few weeks. 

13 comments:

CharlieK said...

Hi Mr IPO,

Where did you find the 6.5% yield for Starhill Global? Their most recent quarter DPU was 1.18 cents (1.37 minus one-time payout of 0.19 cents for accumulated rental arrears). If you annualize that and divide by the current share price of 85 cents, then the yield is 5.6%.

One thing of interest is that whether the IPO price is 85 cents or 90 cents, they are still going to sell the two buildings to the REIT at the same price (it's just that if the IPO price is lower, then the REIT will take on more debt). In other words, to SPH profits the same regardless of the IPO price and the question to the potential IPO subscriber is just how much they want to leverage their investment.

Anonymous said...

Do you think that the 99 leases for the two properties are a strong factor for SPH Reit.

Most of the reits have much shorter leases.. for example Starhill Global, Suntec Reit have leases (I may be wrong)around 60 years or so。

Even the impending reit of OUE, the Hotel and the commercial units also have 60 plus years of lease left.

Mr. IPO said...

I sourced it from capital IQ although I did have some questions on its accuracy. Probably will have to check it out again. Your figures are manually computed ?

Yep I noticed that as well. The leverage will go up if it is priced at lower end of the spectrum.

Mr. IPO said...

Yep. I think 99 years are relatively better than those you pointed out and those or other types like industrial assets. Which is why industrial REITs require a higher interest to compensate investors.

Anonymous said...

Hi Mr IPO,

My first time posting on this blog so would like to say thanks for sharing your analysis with us, because it's been quite useful for me.

Just wondering though if you've looked at IPOs in other markets and if you have advice on how to get involved in those?

Mr. IPO said...

I have played IPOs in HK before but they were offered to me by the brokers. Not sure which market you are interested in ?

Anonymous said...

How is the gearing calculated?

CharlieK said...

Yes I just (manually) annualized the most recent quarterly dividend. It might be somewhat higher going forward since they announced a renewal of the rent agreement with Toshin Development with a new base rent that is 6.7% higher than the current rent.

Thanks again for sharing your analysis. I always look forward to your posts whenever a new IPO comes.

Mr. IPO said...

Debt / equity

Mr. IPO said...

I always enjoy "sparring" with readers who have done their own homework as it "stress tests" my analysis. I looked at the forward yield in a credit Suisse report for REITs and it puts 6% for starhill global. So probably I need to lower it down from the 6.5% used in my analysis.

Anonymous said...

The valuation for Paragon is at S$2.5bn for the REIT. However, according to the last Annual Report from SPH, which was in 31 August 2012, the valuation for Paragon was only S$1.1bn. Does it mean we will be severely overpaying for the acquisition of Paragon?

Anonymous said...

To clarify my question about overpaying for Paragon, I'm asking because I'm wondering if that should affect our decision on whether or not to buy the REIT. I'm still quite new to buying stocks and REITs.

Mr. IPO said...

It's carrying usually at lower value in the sponsor books as they may revalue it once in a while. Similar to OUE H Trust. REIT holders are paying "market value" now.

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