SPH is going ahead with this IPO amid rising interest rates and lackluster REIT performance.
I talked about this IPO previously (article here) and really admire SPH’s execution of it.
Information on the IPO
- Institutional book building: 10-16 July
- Pricing and allocation: 17 July pm
- Singapore public offer: 17-22 July (12pm)
- Listing: 24 July
- Prospectus here
The question on everyone’s mind is whether to punt for this IPO. Have to say this, IPO are never cheap, and the reason companies do IPO at certain time is to extract maximum amount of money from you.
SPH probably consider calling off this IPO due to the recent unfavorable sentiments
We will see in a few days after book building how hot it is.
My feel is that with a name like SPH, its bound to be hot (then again this author got burnt by HPH Trust, so caveat!)
How high will it go? The competitors Starhill Global, Frasers Centerpoint Trust and Capitamall Trust are trading between 1 to 1.2 times Net Asset Value. With the recent sentiments, and the overhanging interest rates sentiments, I believe its price movement will be rather lackluster.
Good to hold?
If you think about it, SPH parent will really depend much on the long term success of this REIT.
This REIT essentially formed 25% of their EPS or DPS. A poor SPH REIT does not bode well for them.
And since they are holding 70% of SPH REIT they have a vested interest there to assure SPH REIT’s investors.
It can also explain why the debt to asset level is from 27-31% (depending on issue price). This is aligned with most shopping mall REITs.
This REIT is trading close to the forward yield of FCT.
It looks better than FCT in that FCT greatest assets, Causeway point and Northpoint are on 81 and 76 years of land lease.
Paragon and Clementi mall are on 99 years and 96 years respectively. By valuation these assets are more valuable.
The yields are almost the same, but essentially a large part of the income driver for SPH REIT is down to Paragon, and that is not suburban and as such will have to be evaluated as a prime retail mall.
Suburban tends to be more defensive, but prime retail is a play on tourism growth as well as Orchard Road as a prime retail mall strip.
These 2 malls are pretty well occupied. So you will wonder how will SPH REIT grow. For any REIT they can
- Grow organically by raising rent according to Singapore economic growth (analyze past data to see at this kind of rent can it grow further)
- Asset Enhancement (Paragon went through one round, and Clementi is still relatively new, so perhaps out of the question)
- Acquisition ( SPH buys and incubates the property and SPH REIT uses rights issue, placement and debt to acquire it)
The third option looks plausible. One word of caution is that SPH have purchase Clementi mall by outbidding the other REITs dramatically (Read here). They purchase based on a forward looking income basis, which means that there are stages where the income stream have not mature yet.
But it also highlights perhaps how desperate SPH were then, to supplement their stagnating media business income.
All this points to that it is likely the rent level is at the upper bound, that there is no optimized space here. Much organic growth will depend on Singapore’s retail growth and GDP growth.
Another important point is as a manager, 15% of income is confirm plus chop earned in the form of management fee, versus you as the SPH REIT investor which is 100% from the REIT income.
End of the day, A trust like such the most important element is the capital allocator, in this case the manager. Not proven much yet, but Paragon have remain well managed so there are some track record.
The important aspect, which is an eye to purchase yield accretive assets with the right kind of financing, that I question (mainly due to the way SPH bids for the Seng Kang and Clementi malls)