News Analysis: Unveiled first acquisition since listing
SF REIT entered into an agreement with its parent company, SF Holding, to acquire a modern logistics property in Changsha for RMB493.2m, equivalent to c.HK$604m. This is based on an agreed property value of RMB540m, which represents a 1.9% discount to its appraised value of RMB550m as of Mar-22. This marks its first acquisition since listing in May-21. This acquisition is a major and connected transaction. Subject to independent shareholders’ approval at an EGM on 22 June, the deal is expected to be completed by end-June.
Strategically located at the Changsha Linkong Economic Development Zone, the property is well poised to serve the logistics needs in Changsha and the central region of China. It is in proximity to major infrastructure including the airport, major expressways, and railway station. Spanning a total GLA of 120,055sqm, the property comprises two land parcels with five major components including a two-storey ramp-up distribution centre, a three-storey warehouse with two underground levels, two single-storey warehouses, a nine-storey office building, and three ancillary buildings. The property is equipped with built-to-suit facilities, such as automatic sorting, cold storage, and supply chain support facilities, to fulfil the needs of various tenants.
Housing a total of 21 tenants, the property was 98.9% let as of Mar-22. Among the sectors, logistics was the largest tenant group, accounting for 77.8% of its leased gross lettable space. This was followed by F&B and technology tenants, occupying 11.4% and 10.6% of the leased space, respectively.
As of Mar-22, SF-connected tenants leased, or contributed, about 68.4% of the property’s leased GLA, or gross rental income. SF REIT has entered into new leases with these connected tenants for a term of approximately four years and eight months commencing May-22, with “step-up” rental arrangements. Upon lease expiry in Dec-26, tenants will have the option of renewing the lease for a further term of up to five years on substantially the same terms, except for rents which will be determined based on the Market Rental Package. Weighted average lease expiry of the property was c.3.9 years as of 31 May 2022.
Based on the average monthly rent and agreed property value of the new acquisition, we estimate an initial gross yield of 7.9%.
The acquisition will be funded by 1) an eight-year onshore term loan of RMB267.2m, 2) a five-year offshore term of HK$259m, and 3) internal resources (RMB21.3m). The onshore loan shall bear an interest cost of 90bps above the loan prime rate for more than five years, which stands at c.4.45%, while the credit margin for the offshore loan is 1.1% p.a.
Upon deal completion, SF REIT’s gearing is expected to rise to 35.5% from Dec-21’s 30.6%.
The acquisition would enlarge the total property valuation of SF REIT by c.10.3%. We have raised our FY22 and FY23 DPU estimate by c.3% and c.6% respectively to factor in the acquisition.
In the past three months, unit price of SF REIT fell 11%. Meanwhile, SF REIT is trading at distribution yields of 9.1-9.5% for FY22-23, which compares favourably to the Hong Kong REITs and Singapore-listed peers. Its valuation remains attractive, even allowing for interest rate hike. The acquisition should signal strong support from its parent company, SF Holding. This should prompt the investors to revisit this quality logistics REIT. Hence, we maintain BUY with a DDM-based TP of HK$5.80.