Share Price S$1.57
Target Price S$2.12
Acquires Upcoming Sydney Office Tower For A$413m
Suntec REIT’s first overseas A$413m (S$482m) acquisition of an upcoming office tower in Sydney is surprising. However, with low Singapore acquisition yields and a high net completion yield of 6.9%, we are mildly positive on the acquisition, which will be 2-4% accretive to DPU. Australia will form less than 6% of its total assets, and it is not anticipated to grow to a significant size. Maintain BUY with a higher target of S$2.12 from higher income offset by a 50bp higher RRR with overseas risk.
• A$413m acquisition of upcoming office tower in North Sydney. Suntec REIT is proposing to acquire a 31-storey upcoming Grade-A office development at 177-179 Pacific Highway in North Sydney for A$413.19m (S$482m), which is in line with the independent valuation by Colliers. The freehold property, with an expected NLA of 423,915sf is expected to be completed by early-16. The property is well located in the secondary North Sydney CBD at the junction of Pacific Highway and Berry Street and is a 5-minute walk from the North Sydney station.
• Supported by 100% pre-commitment by The Leighton Group, which will take a head lease for 76% of the NLA of the property, with a weighted average lease expiry (WALE) of 10 years. Leighton Holdings, one of Australia’s largest building, contracting and property development groups, will also provide a rental guarantee for four years over any vacant space upon completion. The property will be the corporate headquarters of Leighton Holdings.
• NPI yield of 6.89% upon completion, while Suntec REIT will receive coupon payments of 6.32% p.a. for progress payments to Leighton Holdings as the building is under construction. The acquisition cost is reasonable, given the secondary CBD location. In comparison, Keppel REIT’s acquisition of 8 Exhibition Street in Melbourne in 2Q13 was at a NPI yield of 6.5%. The acquisition psf of A$972/S$1,138psf compares favourably with Keppel REIT’s valuation of S$1,810psf for 8 Chifley Square in central CBD Sydney.
• Fully funded by 5-year debt. The transaction will be fully funded by a S$500m 5-year unsecured loan facility by Commonwealth Bank of Australia, DBS Bank and Standard Chartered Bank.
Acquisition is surprising given that we had anticipated management would focus on its asset enhancement (AEI) at Suntec City Mall and potential acquisition of the Straits Trading Building, with the recent strategic partnership between ARA and Straits Trading. However, we note that office acquisitions in Singapore are increasingly more difficult to execute without income support due to the low initial NPI yields of 3-4% for Singapore office properties and the higher trading yields of 5-6% for office REITs.
• New avenue of growth in Australia with Suntec REIT’s first crossborder acquisition. The substantial pre-commitments and rental guarantees will provide a stable and recurrent source of income for Suntec REIT. Also, according to Jones Lang Lasalle, the new building will be North Sydney’s first new Grade-A office property in six years, and should set new rental benchmarks.
• Australia’s contribution will still be small at below 6% of total assets of S$8.1b for Suntec REIT. We do not anticipate that management will seek to grow the foreign proportion of Suntec REIT’s assets beyond 10- 15%.
• Gearing to rise to 3.6ppt to 40.8% from 37.2% currently upon completion of the construction in 2016. However, we believe that gearing will remain below 40% as Suntec will enjoy revaluation gains from the ongoing AEI at Suntec City Mall, which is slated to be completed by end- 14. We believe that any substantial equity fund raising is likely to be paired with the potential acquisition of the Straits Trading Building.
• We raise our 2014-2015 DPU estimates by 2-3% to factor in the impact of the acquisition. Risks include a mismatch between Australian dollardenominated assets and Singapore dollar-denominated debt, a downturn impacting office demand in Australia and Singapore, and execution of the AEI at Suntec City Mall.
• We maintain BUY with a higher target price of S$2.12 (from S$2.07) based on DDM (required rate of return (RRR): 7.1%, terminal growth: 2.2%). We have also raised our required rate of return by 50bp to factor in the overseas and execution risk.
Share Price Catalyst
• Well-managed execution of Suntec AEI, with impact on occupancies and rentals mitigated.
• Positive newsflow on office and retail capital values, AEI, tenant movements and renewals, rentals and occupancy.
Publish date: 18/11/13