SPH REIT's acquisition of Seletar Mall could boost firm's DPU by 5% per annum

The acquisition cost is estimated at $500m.

Buying Seletar Mall could buoy Singapore Press Holdings (SPH) REIT, DBS Equity Research said.

“Assuming an acquisition cost of $500m for The Seletar Mall, and a 30/70 equity/debt funding mix, we estimate that the acquisition could boost SPH REIT’s DPU by 5% p.a.,” the firm explained. “Given ample debt funded capacity, a higher debt-funded acquisition would lift DPU and share price up further.”

In addition, although other analysts are cautious on the retail sub-sector especially in Orchard, DBS Equity Research thinks that the limited upcoming retail supply in the submarket and well-executed strategies leading to the turnaround at Paragon is proof of the portfolio’s ability to withstand challenges.

According to the firm, Paragon’s rental reversion fell 3.7% for new and renewed leases cumulatively for FY2018.

“Earlier leases were committed during the retail sales downturn, however, with the recovery in retail sales in the second half of 2017, the cumulative decline was moderated during the financial year,” the firm explained.

Meanwhile, the firm noted that a higher and faster projected rise in interest rates could affect its DPU estimates for the REIT.

“SPH REIT has however proactively swapped in a substantial portion of debt into fixed rates,” they noted.

In Q4, SPH saw its net property income slip 1.9% to $40.98m. Despite this, distribution per unit (DPU) grew 0.7% to $0.143.