SPHREIT – CIMB

Right dose of class and stability

SPH REIT is a retail REIT with two quality and well-located assets in Singapore (Paragon and Clementi Mall). We believe that the portfolio offers a unique combination of prime Orchard Road and suburban retail, and an alternative play on rising medical tourism in Singapore.

Using DDM-based (discount rate of 7.7%), we arrive at a target price of S$1.06, translating to implied CY14 yields of 5.4% for unitholders. We deem this fair against listed peers such as CMT, FCT and MCT, which trade at CY14 yields of c.5.6-5.7%.

Dose of class and stability

SPH REIT is a retail REIT with two quality and well-located assets in Singapore valued at a total of S$3.2bn. They are: 1) Paragon, a premier upscale mall and medical suites/office property in the heart of Orchard Road, and 2) Clementi Mall, a mid-market suburban mall located in the centre of Clementi town. We believe that the portfolio offers a unique combination of prime Orchard Road and stable suburban retail, and an alternative play on rising medical tourism in Singapore.

Paragon is the main draw

The main attraction for SPH REIT is Paragon. We like Paragon‟s 1) clear luxury positioning, 2) strategic location near Mount Elizabeth Hospital, 3) unbeatable track record of 100% occupancy and annual rental growth over the past 10 years, and 4) synergies between the mall and the medical tower. We expect Paragon to benefit from the government‟s positioning of Singapore as a top luxury lifestyle destination and from the nation‟s expanding medical tourism. We see growth from positive rental reversions (as its current passing rent of S$21psf is at the lower end of its peers‟ S$21-24psf, based on our estimates), rental step-ups, healthy occupancy cost of 15.7% (estimated by Urbis), and potential rise in medical suite rents. Meanwhile, Clementi Mall offers stable suburban retail exposure, further enhanced by a five-year income support.

Further growth potential through acquisition

With an asset leverage of 26.9%, SPH REIT has a debt headroom of c.S$415m to 40% asset leverage for acquisitions. Key pipeline asset includes The Seletar Mall, which is slated for completion by end-2014. Given its good mix of stability and room for growth, we initiate coverage on SPH REIT with an Add rating and TP of S$1.06.