SPH REIT‘s (SGX: SK6U) share price (technically known as unit price for REITs) is currently at S$0.99.
At that unit price, SPH REIT has a price-to-book (PB) ratio of just above 1 and a distribution yield of 5.7%.
Is SPH REIT a buy in my books at its current price and valuation?
Let’s explore using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
SPH REIT is a Singapore-based REIT that invests in assets mainly for retail purposes in the Asia-Pacific region.
Currently, SPH REIT has a portfolio of five assets in Singapore and Australia, as of 6 December 2019.
In Singapore, the REIT owns:
- The Clementi Mall; and
- The Rail Mall.
Over at Australia, SPH REIT has:
- An 85% stake in Figtree Grove Shopping Centre, a freehold sub-regional shopping centre in Wollongong, New South Wales; and
- A 50% stake in Westfield Marion Shopping Centre, the largest regional shopping centre in Adelaide, South Australia.
SPH REIT’s sponsor is media giant, Singapore Press Holdings Limited (SGX: T39). As of 10 October 2019, Singapore Press Holdings had a 69.8% interest in SPH REIT.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
SPH REIT has a financial year that ends on 31 August each year. Let’s look at the REIT’s financial performance from FY2015 to FY2019 below:
|FY2015||FY2016||FY2017||FY2018||FY2019||Compound annual growth rate (CAGR)|
|Net property income|
It can be seen that SPH REIT’s gross revenue and NPI have stepped up well over the years.
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Next, let’s find out if DPU has increased over the last five years too.
|Distribution per unit (Singapore cents)||5.47||5.50||5.53||5.54||5.60||0.6%|
Indeed, SPH REIT’s DPU has grown just like its gross revenue and NPI from FY2015 to FY2019.
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For FY2019, SPH REIT had an NPI of S$179.8 million and a portfolio value of S$3.60 billion. This translates to a property yield of 5%.
SPH REIT just passes this criterion.
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 30 November 2019, SPH REIT’s gearing ratio was well below 40%, at just 26.8%.
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
SPH REIT had an interest cover of 5.9x, as of end-November 2019, given its NPI of S$46.96 million and finance costs of S$7.93 million.
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
SPH REIT’s portfolio maintained a strong occupancy rate of 99.3%, as of 30 November 2019.
The following chart shows the occupancy rates at SPH REIT’s individual properties:
Westfield Marion Shopping Centre, which was acquired on 6 December 2019, had an occupancy rate of 99.3%.
7. Rental Reversion Check
Check for: Positive rental reversions
For the first quarter of FY2020, SPH REIT posted a strong rental reversion of 10.9% for its Singapore portfolio.
We are concentrating on the local properties since they make up the bulk of SPH REIT portfolio value at 94.7% (as of 31 August 2019).
8. Growth Prospects Check
SPH REIT has room to grow further.
Its recent acquisition of Westfield Marion Shopping Centre is expected to be DPU-accretive. SPH REIT also has room to acquire more assets, given its low gearing ratio of below 30%, which is one of the lowest among Singapore REITs.
SPH REIT has a right of first refusal (ROFR) on Singapore Press Holdings’ The Seletar Mall property, which has maintained a high occupancy rate since its opening. The ROFR agreement allows SPH REIT to get first dibs on the property before anyone else.
SPH REIT’s manager is also exploring “acquisition opportunities that will add value to SPH REIT’s portfolio and improve returns to Unitholders”.
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At SPH REIT’s unit price of S$0.99, it is valued at a PB ratio of 1.04x.
The REIT is fairly valued right now given its five-year average PB is 1.06x.
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At SPH REIT’s unit price of S$0.99, SPH REIT has a distribution yield of 5.7%, which is acceptable.
The Final Verdict
SPH REIT has a final score of 10/10, but I’m deducting one point from the total score as the REIT has concentration risk in its portfolio.
SPH REIT owns just five assets, and Paragon took up the bulk of its FY2019 gross revenue at 75%. If anything were to happen to that portfolio in particular, SPH REIT’s gross revenue would be hit drastically.
Therefore, SPH REIT gets an adjusted final score of 9/10.
Overall, the REIT still looks strong given its:
- Growing gross revenue, NPI, and DPU;
- Healthy balance sheet;
- Strong occupancy rate; and
- Decent valuation.
With that, I wouldn’t mind investing in SPH REIT with a portfolio weighting of 1% if I’m looking to expand my dividend portfolio.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.