On 21 December 2018, SPH REIT (SGX: SK6U) made its maiden acquisition in Australia. This was the REIT’s second transaction in 2018, following its acquisition of the Rail Mall in May 2018. The buying spree has marked a significant change in strategy with SPH REIT having not made any acquisitions since its listing in 2013 up till this year. Together, with its existing assets- Paragon and The Clementi Mall, its two acquisitions bring its asset count to four and expand its geographical footprint beyond our shores.
Here is what investors should know about the latest acquisition and how it will impact unitholders going forward.
The property purchased was Figtree Grove Shopping Centre, a sub-regional shopping centre located in Wollongong, New South Wales. It sits on a freehold land area of 50,900 square metres and has a gross lettable area of 21,984 square metres.
The property is anchored by 24-hour Kmart, Coles and Woolworth supermarkets. It counts 2 mini-majors, 72 specialty stores, and 9 kiosks as tenants. In addition, there are 4 ATMs, 2 external tenancies and 1 pad site, offering a variety of services F&B options and other retailers. It is 3.7km south-west of Wollongong Central Business District and 71km from Sydney CBD. Figtree Grove serves a total trade area of approximately 207k residents.
SPH REIT purchased an 85% stake in the property for a purchase consideration of A$206.0 million. The transaction was fully funded by debt and based on estimates will increase the trust’s gearing to around 30.1% from 26%, which is still on the low side.
The low gearing level gives the trust ample headroom to take on more debt should it wish to.
Impact on income and DPU
Management did not give an exact estimate on the DPU impact but, importantly, it did say that the acquisition will be DPU accretive. Net property income yield is estimated at around 6% based on transaction price excluding fees. Taking into account the transaction costs, the yield will be around 5.7%.
A Foolish Take
While there are risks in investing in an Australian market that has seen one of the worst property bubbles in recent years, Figtree Gove’s strong fundamentals could make it a good long-term investment for SPH REIT.
Suburban malls are also more resilient than urban malls, and with its fairly large catchment area of 207,000 residents, it is well-situated for long-term stability. Moreover, its anchor tenants, Coles and Woolworth, the two largest supermarket operators in Australia will likely ensure the mall remains relevant even in the challenging retail climate.
In the past, SPH REIT was resistant to making major acquisitions. However, the two recent acquisitions of Rail Mall and now Figtree Grove could signal a change in tact. With a low gearing ratio, SPH REIT has the financial muscle to make more debt-funded acquisitions that can be yield-accretive. If put to use, SPH REIT can deliver earnings-accretion and unlock more shareholder value in the future.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.