Sunday 25 July 2021

SPH REIT- Why One Should Invest In It Today In View Of SPH "Divestment" of Media Segment.

The million dollar question is what has SPH REIT got to do with the divestment of the upcoming Media segment from Singapore Press Holdings ("SPH")? The short answer to that is that we are now seeing the conversion of SPH to a true property management company (and to a smaller extent a developer like Capitaland and City Development from its development of Woodleigh Residences). There are 2 interesting developments arising from the ripple effect, that is, the (i) up and coming Student Accommodation business being injected and (ii) the possibility of new shareholders in the future mounting a takeover of SPH and merging its properties portfolio into their own REITs currently listed on SGX. I will elaborate a bit more on the above 2 points later in my post below. 

1. Misconception that Retail REITs is dead given that Pfizer and Moderna vaccine cannot prevent COVID infection as mentioned by some "analysts".
First and foremost, let me address this strange misconception by some of the "analysts" out there that lockdowns will be frequent and it will disrupt retail malls operations and hence huge plunge in rental income again. This is totally nonsense. We have seen from statistics present in Israel and also our local Singapore that both mRNA vaccines are extremely effective in stopping severe illness from COVID for those fully vaccinated. Yes, there is a chink in our current amour that even with 2 shots, a person might still become infected with COVID. But the difference here is that it has been scientifically proven that the incidents of moderate to severe illness for those fully vaccinated have gone down dramatically.  This means that our medical facilities will not be overwhelmed with rising COVID cases which is gradually becoming more like the normal flu.

It is also no secret that based on what the ministers have said, once the vaccination rates start to get to over 67% by 1st week of August'21, we will be moving on to a gradual opening up of our economies and targeted/selected closure of COVID clusters instead of the previous draconian closure measures. In addition, there is no doubt that we will need a 3rd shot booster soon by next year. Pfizer and Moderna are already working on a mix of current vaccine with a new Delta Variant vaccine combined to put an end to this dominant and infectious strain. 

2.  Government paying for wage subsidy and rental relief of retail tenants affected by "Heighten Alert"
 One piece of good news with recent restriction of dinning and movement is that the government has again took out money amounting to a S$1.1 billion rescue package for partial rental relief and wage subsidy. Retail REITS are thus spared from granting painful rental relief packages like last year. Although rental collected component has a small part that is dependent on retail sales of tenants, the effect will not be as drastic as the previous Circuit Breaker in 2020. 

3. SPH REIT performance has improved drastically with distribution yield being partially restored to an annualized 5.41% distribution yield. 
Gross revenue generation for SPH REIT for Q3 FY2020 has been remarkable across all its Singapore and Australian malls and improved by 22.2% year on year with a huge drop in required rental relief to eligible Singapore and Australia tenants.
The high occupancy rate of 98.4% of SPH REIT is driven by the resilience of its sub-urban malls with 100% occupancy at The Rail Mall and Clementi Mall. Also WALE of 5.4 years by NLA. This speaks volume of the strategic locations of all its Singapore and Australian malls situated at strategic locations with dominant catchments. 

Distribution yield has gradually recovered to 1.38 cents for Q3 FY2020. If we were to annualized this (remove 0.13 cents one -off non-recurring deferred prior year income)  based on S$0.925 per unit, this will be a distribution forward yield of 5.41%. If it recovers higher to pre-covid, then the distribution yield will be at least over 6.2%.
4. SPH After Divesting Media Segment- Ripple Effect on SPH REIT
As mentioned earlier, SPH will become a de-facto Property Investment and Management Group after the transfer of its Media business into a not for profit entity. There are 2 interesting ripple effect on SPH REIT here. 

(a) The student accommodation business in future maybe be injected into SPH REIT. While there is also a possibility of SPH spinning this into another REIT, there is a real possibility that SPH might just pump them into a single REIT for synergy purpose and compliance cost savings from another listing.

(b) Market talks these days have been rift that there will be new investors coming into SPH and these could include Keppel Corp, Capitaland or Mapletree Investments. This is not surprising given that these entities are ultimately owned by the Singapore Government. With the transfer of the media business out of SPH totally, there is actually no longer any good reason for there to be another property group in Singapore. It makes more sense for either Capitaland or Mapletree to come in and buyout the investment properties and then bundle them into their own existing REITs. Economies of scale and much cost savings is thus the logical future step going forward. For example, personally, I see no reason why we need to continue to keep the current CEO of SPH when there are other CEOs in Keppel Corp, Capitaland or Mapletree with the appropriate and more relevant industrial knowledge. There has been enough "umbrage" going around....time to move on and extend a golden handshake.
Parting Thoughts
What a year it had been for SPH REIT. From my last posting on SPH REIT on 23 December 2020 where I have mentioned that SPH REIT is severely undervalued by as much as 30% from its pre-COVID peak, one reader has disagreed vehemently on my valuation projection. Its current price is now at S$0.925 per unit as at 23 July 2021 with restored annualized distribution yield projected at 5.41%. 

As alluded to point 4, I think that eventually, it makes more sense to merge the entire SPH group with Capitaland, Keppel or Mapletree Investments. My personal thoughts is that it is an inevitable eventuality given the benefits of economies of scale. Personally, I will take umbrage if future corporate actions do not materialise.

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