22/7/2013 – Media group Singapore Press Holdings (SPH) is finally listing its iconic properties – Paragon and the Clementi Mall – in the form of a Real Estate Investment Trust.

It lists Wednesday at a price of S$0.90 per unit.

The placement was oversubscribed 42 times, for malls which are valued at more than S$3 bln and have a committed occupancy of 100%, thanks to their location.

Further details about the properties can be found on page 109 of the prospectus.

But a reading of the prospectus leaves 13 questions that need to be asked.

Chief among these is the apparent shortfall in its operating cash flow to pay all its bills.

By our calculation, it will not have enough to pay its debts and interest, upgrade lifts and escalators at the Paragon, and still pay unitholders a minimum 90% of Net Income.

Then there is the issue of the income support SPH is still receiving – and will continue to receive for another five years – for its Clementi Mall.

This income support boosts the yield. What happens when this support ends?

Then there are broad questions about how SPH – the parent company – will fare without full ownership of the malls.

Earnings from the Paragon was a wonderful buffer when its traditional print business took a dive. Henceforth it will only own 70% of the malls.

We have 13 questions that need to be asked.

SPH has declined to answer them.

FINANCIALS

The REIT has disclosed results for H1 FY13:

Gross revenue: +4.4% to S$97.4 mln
Net property income: +5.1% to S$71.5 mln
Distributable income: +7.3% to S$53 mln
Cash flow from operations: S$69.8 mln vs S$70.9 mln

The REIT's historical numbers are not comparable as the Clementi Mall, which comprises 18.5% of the initial portfolio, was only available for full occupation in March 2011.

But Paragon has achieved 100% committed occupancy rate for the past three years and Clementi Mall has also achieved 100% committed occupancy rate since it opened in 2011.

Adding H1 FY13 actual revenue numbers to the projections for H2 and comparing it with forecast FY14 numbers, we deduce that growth in revenue for FY13 will be 3% for this year and 4% for FY14.

Growth in distributable income will be 15% in FY13 and 13% in FY14.

The distribution yield for FY13 is forecast at 5.58% and 5.79% for FY14.

But investors need to be aware that SPH REIT will receive rental support for its Clementi Mall from the vendor, CM Domain, for up to the next five years from the listing date.

In the event that Clementi Mall's net property income falls below the guaranteed income amount of S$31 mln per annum, the vendor will pay the difference to the Trustee up to S$20 mln.

The aggregate top-up payments for H2 FY13 and FY14 amount to S$2.7 mln and S$4.7 mln.

That doesn't sound like much, but FY14 income support represents almost one-fifth of property income at Clementi Mall (18.1%).

And without income support (and all else being equal) the yield will fall to 5.35% for FY13, and 5.58% for FY14.

1. Why will it take up to another five years before income support is no longer required?

And the obvious follow-up question is:

2. What is SPH REIT's plan to not depend on the income support from CM Domain?

Then there are questions surrounding its cash flow.

Its distribution policy of 100% in FY13 and 90% in FY14 may make it difficult to meet all of its obligations to repay any future borrowings through its cash flow from operations.

On page 57 of the prospectus, SPH REIT states categorically: " SPH REIT may not be able to meet all of its obligations to repay any future borrowings through its cash flow from operations" .

Upon listing, SPH REIT will have in place a secured term loan facility of S$975 mln which will be drawn upon for an amount of S$850 mln.

The facility will be used to part finance the acquisition by SPH REIT of the properties.

One third of the Facility is repayable in each of three, five and seven years.

This should come to around S$90 mln of principal payment per year starting from next year.

Deducing from the proforma financial numbers, cash flow from operating activities should be around S$140 mln per year.

On a base case scenario, it will have to distribute income to unitholders of around S$90 mln, pay for debt of approximately S$90 mln and interest expense of around S$15 mln.

Capital expenditure is expected to be S$14.4 mln in FY14 as per the prospectus.

This totals to almost S$210 mln, which is far more than expected cash flow from operations of S$140 mln leading to a difference of S$69 mln.

3. How can SPH REIT afford a big payout without going further into debt, or issuing new units?

Its proforma cash balance for H1 FY13 stood at S$43.6 mln, which is still less to cover up for the difference.

The bottom line: it will have to roll over loans, or issue new units, or both.

Further details can be found on page 48 of the prospectus.

(Total: 13 questions)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

SPH has declined to comment.