SPH REIT (SGX: SK6U) invests in retail properties in Asia-Pacific. Its portfolio consists of four properties: Paragon, The Clementi Mall, The Rail Mall located in Singapore, and an 85% stake in Figtree Grove Shopping Centre in New South Wales, Australia. The Singapore portfolio is valued at S$3.37 billion, and the Australian asset at A$206 million as of August 2018. SPH REIT’s sponsor is Singapore Press Holdings Limited (SGX: T39), a leading media organisation that publishes newspapers, magazines, and books in both print and digital editions.
SPH REIT recently announced its Q3 2019 earnings (ended 31 May 2019), and distribution per unit (DPU) increased by 1.5% year on year. Gross revenue increased by 12.7% year on year mainly due to the inclusion of the Rail Mall and Figtree Grove assets, which were acquired in June and December 2018, respectively. Investors may be wondering if DPU can continue to show improvement now that these new assets have already been accounted for.
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Here are three reasons I believe the REIT can continue to raise its DPU.
1. Low gearing
SPH REIT’s gearing level as of 31 May 2019 was 30.1%, and though this was higher than its gearing level of 26.3% at the 2018 fiscal year-end (31 August 2018) due to debt taken up to finance the acquisition of Figtree Grove, it still remains way below the statutory limit of 45% imposed on all REITs by the Monetary Authority of Singapore.
This level of gearing offers the REIT sufficient debt headroom to take on additional borrowings in order to fund DPU-accretive acquisitions, which will boost future DPU for unitholders.
2. Positive rental reversion
Rental reversion has been strong on a portfolio level, at 8.4% as disclosed in the latest quarter. Two of the malls, Paragon and The Rail Mall, registered reversions of 8.6% and 9.1%, respectively, which is impressive considering Paragon is a relatively mature asset. These positive reversions will boost future rental income and raise total distributable income — and will eventually influence a higher DPU.
3. Seletar Mall
SPH REIT has a right of first refusal on The Seletar Mall, which the sponsor currently owns. This mall opened on 28 November 2014 and has maintained high occupancy since then. This potential asset injection into the REIT from the sponsor’s pipeline will improve DPU and also further diversify the REIT’s portfolio, as it currently only contains four properties.
Multicurrency debt programme
Yesterday, SPH REIT announced it had established a S$1 billion multicurrency debt issuance programme, where part of the proceeds may potentially be used for a possible acquisition. The REIT is currently conducting due diligence on this potential acquisition, but the manager has cautioned that there is no assurance the acquisition will materialise at all.
A decent yield with clear growth prospects
SPH REIT offers good exposure to three prime retail properties in Singapore as well as some exposure to a retail mall in Australia. Its trailing dividend yield based on the last 12-month DPU of 5.57 Singapore cents is around 5.1% at the last traded price of S$1.09. Based on the three reasons above, investors should see a steady and consistent increase in DPU for the REIT. Future acquisitions could further bump up the DPU and diversify the portfolio’s risk.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.