SINGAPORE (May 6): On April 22, Singapore Press Holdings announced it had entered into an agreement to sell its stake in the retail podium and four office strata units (Chinatown Point mall) at the Chinatown Point integrated development in Singapore’s Chinatown. The media behemoth, which is transforming into a property investment company, owns the stake through its 30.68%-held associate, Perennial Chinatown Point (PCP) and various other entities.

SPH says it will book a gain of $10 million. The company had raised its stake by another 20% in November 2016 from the 7.35% acquired in 2010, and a further 3.3% in November 2017 to 30.68% currently.

“Based on the group’s annual report ended August 2018, dividend received by PCP amounted to $2.2 million on a carrying value of $51.6 million,” UOB Kay Hian says in an update. That implies a yield of 4%. “This is in contrast to newer and higher-yielding assets in the student accommodation space (of up to 6%).”

The low yield could be the reason SPH — and Chinatown Point mall’s larger shareholder Perennial Real Estate Holdings (PREH) — decided to divest the stake.

SPH’s real estate investment trust, SPH REIT, is known to be on the lookout for accretive acquisitions, but Chinatown Point mall is probably not one of them, an analyst says. In SPH REIT’s portfolio, The Paragon’s capitalisation rate was 4.5% as at Aug 31, 2018, The Clementi Mall at 4.75% and The Rail Mall, 6%.

For SPH REIT’s 1HFY2019 ended Feb 28, the three malls reported positive rental reversions averaging 8.4%. The Paragon recorded reversions of 8.6%, The Clementi Mall 5% and The Rail Mall 6.2%.

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Last December, SPH REIT acquired an 85% stake in Figtree Grove Shopping Centre for A$175.1 million ($169 million), with a net property income (NPI) yield of around 6%. The mall is in Wollongong, which is about 71km southwest of Sydney.

Last May, the REIT acquired The Rail Mall for $63.2 million, at an NPI yield of more than 6%. Figtree Grove provided two months of contribution to SPH REIT’s 2QFY2019. Its distribution per unit for the quarter rose 0.7% y-o-y to 1.41 cents, giving an annualised DPU of 5.64 cents, which translates into a yield of 5.4%.

SPH prefers higher-yielding student accommodation

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On April 16, SPH announced it was acquiring a portfolio of purpose-built student accommodation (PBSA) assets in the UK for £133.7 million ($235.7 million). This new portfolio spans three university towns — Southampton, Sheffield and Leeds — and has a total capacity of 1,243 beds. The portfolio comes with a rental guarantee that covers the 2018/19 and 2019/20 academic years to provide a target income of £9.9 million for the 2018/19 academic year and £9.76 million for the 2019/20 academic year. Based on pro forma figures, net profit after tax will rise by $7.4 million.

Last year, SPH acquired its first portfolio of PBSA in the UK for £180.5 million. Student accommodation is part of SPH’s strategy to expand its asset management business to acquire cash-yielding assets in multiple defensive sectors. “The assets will further strengthen our robust base of recurring income from our property portfolio, which currently represents more than 50% of our group’s profitability,” SPH said in its 2018 annual report. In total, assets under management for student accommodation are in excess of $600 million.

PREH also announced it had agreed to divest its 50.64% stake in Chinatown Point mall. Its share of the net proceeds from the sale — which is likely to be completed in June this year — is expected to be around $125.3 million, and its divestment gain is about $17.2 million, PREH says in a statement.

“Based on net proceeds of $125.3 million received by PREH, we estimate SPH would receive approximately $65 million to $75 million for the transaction,” UOB Kay Hian says.

On April 22, PREH also announced that the group was expected to record a net loss for 1QFY2019, which was mainly due to the weaker operating performance of its newly operational assets and higher financing costs. It said the group expects to turn profitable in 2Q on completion of the disposal of Chinatown Point mall.

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According to PREH’s annual report, as at March 4 this year, its free float is small. About 16.04% of its issued shares is held by the public and as at Dec 31, 2018, about 82.3% of the stock was held by four of PREH’s “core sponsors”: Kuok Khoon Hong (effective interest of 36.5%), Wilmar International (effective interest of 20%), Ron Sim (effective interest of 15.5%), and Pua Seck Guan (effective interest of 10.3%).

Since listing in 2014 through a reverse takeover, PREH has not reported positive operating cash flow and free cash flow (see Table 1). It is not alone; several other companies have reported negative operating cash flow and free cash flow (see Table 2) but these include those involved in the penny stock saga. Some of the companies in Table 2 are quite stressed.

PREH’s net debt-to-equity ratio has been rising over the past few years. Last year, it consolidated The Capitol Singapore’s debt after it took over the 50% stake it did not own from former partner Chesham Properties. Net debt-to-equity ratio stood at 0.72 times as at Dec 31, 2018, up from 0.57 times a year ago and higher than the 0.45 times as at Dec 31, 2015.

In addition to taking on debt to fund The Capitol Singapore, PREH also took on new loans and borrowings to fund investments and to refinance expiring multicurrency medium-term notes. In January and August 2018, PREH issued $120 million fixed-rate notes at 3.90% a year due in 2021, and $180 million fixed-rate notes at 5.95% a year due in 2020. The proceeds from these MTNs were utilised to partially fund the redemption of the MTN of $100 million due in March 2018 and retail bonds of $300 million, which matured in October 2018.

On March 18 this year, PREH announced it had fully redeemed its $125 million 4.9% notes, which had matured. A further $762 million of loans will be maturing this year. These comprise secured loans of $227 million, fixed-rate notes of $125 million and unsecured loans of $410 million. PREH says it “has commenced discussions with the respective lenders to refinance the loans which are coming due in the next six months”.

Despite its somewhat stressed cash flow over the years, PREH has assets it can monetise. For instance, it plans to continue with strata sales at 111 Somerset and it can sell its residential units at Eden Residences Capitol. The group owns AXA Tower, which is undergoing an asset-enhancing initiative.

In China, PREH owns stakes in several properties. These include a healthcare facility in Chengdu, shopping malls in Chengdu, Foshan and Shenyang, and an integrated development in Tongzhou that is under development. The investment properties are valued at capitalisation rates of 5.25%. The company plans strata sales of its Tongzhou project. It is not clear if the investment properties and properties under development can be easily monetised if the need arises.

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Yields higher at SPH and SPH REIT

Although SPH and SPH REIT are both viewed as dividend plays, SPH REIT is likely to be the more defensive of the two in the near term. SPH is in the process of transforming into a property development and investment company. As such, its dividends have been falling (see Chart 1). Excluding a special dividend for FY2018, SPH’s dividend would have been 11 cents, translating into a dividend yield of 4.4%.

Interestingly, UOB Kay Hian upgraded SPH to a “buy” this year. “The rising importance of resilient assets in SPH’s portfolio and the new management’s effort to expand the defensive business have been underappreciated,” the local broker says. UOB Kay Hian has a target of $2.82 for SPH, as student accommodation and the property sector are likely to cushion the decline from the media business.

While analysts are lukewarm towards SPH REIT, its DPU has increased gradually on an annual basis since its IPO in July 2013 despite headwinds in the retail sector (see Chart 2). SPH REIT listed at 90 cents per unit and it has not asked unitholders for equity to fund acquisitions. Its pipeline asse t, The Seletar Mall, has a carrying value of $488 million. Given its current aggregate leverage of around 30.1% following the Figtree Grove acquisition, SPH REIT could acquire The Seletar Mall with debt and a modest placement to keep its aggregate leverage below 40%.

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SPH opts for higher-yielding properties; PREH to report 1QFY2019 loss as cash flow remains in the red

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