Investor Central: SPH REIT ― When is the Seletar Mall actually going to become part of the portfolio?

KUALA LUMPUR, Oct 14 ― SPH REIT is remaining non-committal on when it will buy Seletar Mall, even after CIMB said it would be in the next 1-2 years.

The S$3.1 billion (RM8 billion) REIT will only acquire it once sales there have stabilised, which means it could be much longer than this time period.

CEO Susan Leng Mee Yin, and CFO Soon Suet Har provided these and other insights about the Singapore property market as well as its malls at a seminar organised by the Securities Investors Association (Singapore).

Ms Leng explained it would be very easy to inject the mall into a portfolio, but if sales were not sustainable rentals would come down and hence, distributions to unitholders would be low.

The caveat is if sales come in at surprisingly high level.

About 9 million tourist arrived in Singapore for the first seven months.

But situation in Thailand and recent unfortunate tragedies in the airline industry have shaken confidence.

So tourist numbers have declined.

In the next five months, Singapore needs to achieve 7.4 million tourist arrivals to reach the target of 16.4 million set by the government.

This is not impossible, given that the second half is good for tourism as people tend to travel more over the Christmas/New Year period.

Investor Central. We keep your investments honest.

1. Audience: What is your view on current rental renewals?

There are reports that local retailers are struggling with high and painful rental renewals.

In terms of global competition, other countries are planning casinos and of course, interest rate are rising.

So, would rentals have short term adjustments?

CEO's Reply: From a business point of view, rental is a key component and the other key factor is labour.

From a retailer point of view, each business set up should make sense to him or her.

The number of labour or manpower that they can recruit is sometimes not within their control.

So, retailer would wonder how to continue?

They will look at good performing units and cut back on unstainable units.

In future, retailers would be very savvy in terms of where they open new units and where they continue their presence.

For example, more than 90 per cent of retailers chose to stay with Clementi because the business is tested and they know the kind of sales they can achieve.

Bottom-line, we have to give them the best environment so that the mall becomes their best choice.

2. How do you actually make your money?

It's not just retailers paying the rent they also share part of the revenue.

CEO's Reply: Our rents are definitely not below market rate especially for Clementi Mall which has already achieved S$1,590 per square foot in first lease cycle.

Even before signing the lease agreement, we discuss with the tenant about their sales projection and sustainability.

3. What about raising parking charges?

CEO's Reply: Paragon Mall has a surcharge for vehicles parked before the mall’s shops open.

This is because there is a hospital nearby. So, people visiting the hospital will park their vehicles at the mall due to limited parking availability.

However, the surcharge is just S$2 and is redeemable if you shop for S$30 in the mall.

We don’t want to increase the car park charges to such a point that shoppers should feel the mall is too expensive.

4. Do you have any plans to manage overseas REIT?

CEO's Reply: Our mandate is Asia Pacific but our focus will be Singapore, at least in the near term.

However, we are doing a ground study on the overseas expansion.

5. Do you think you will exhaust the S$20 million income support in five years?

CFO's Reply: Based on our year-to-date performance, especially the Clementi mall that performed better than forecast, the income support we actually require is lower.

So, at this point S$20 million of income support would be more than sufficient.

However, we also have to see the economic conditions during the remaining period of the income support and we cannot guarantee that we will exhaust it faster or slower.

6. Why are management fees based on NPI as opposed to DPU?

CFO's Reply: The management fees is based on two components, 5 per cent of net property income and 0.25 per cent of net asset value.

So, management fees may not grow in proportion to net property income but the fee structure is in line with market.

7. Is your forecast operating cash flow sufficient to pay down the debt after factoring interest expense and capital expenditure?

CFO's Reply: Yes, definitely. Our net property income margin is 75 per cent which is very healthy and is sufficient to cover the financing cost.

8. Why did you lose S$9 million in nine months on net hedging reserve?

CFO's Reply: This is the insurance premium we need to pay for hedging our debt.

In accounting terms, it’s a fair value loss or a net payable position because of the gap between the short term and long term rate.

If we see short term rate increasing then we may be in a receivable position.

9. Why is the yield for Paragon lower than Clementi?

CFO's Reply: Yield for Paragon is 4.8 per cent and Clementi is 5.4 per cent. Paragon is a blended yield of medical and office as well as retail. The yield of Clementi Mall is in line with other suburban malls. ― Investor Central

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