Price Target : 12-Month S$ 1.80 (Prev S$ 1.82)
First overseas acquisition
•Buys landmark Australian office asset
•Positive carry impact on DPU during construction with upside from rental escalations
•Maintain BUY with S$1.80 TP
Buying landmark Australian office asset. Suntec REIT announced that it has entered into an agreement to acquire a 100% stake in a freehold land in North Sydney CBD, which will be developed into a 31-storey office building, to be completed in 2016, with NLA of 424k sqft. The acquisition, costing A$413m, will be fully funded by a 5-year unsecured loan. The REIT intends to hedge the purchase price upon completion of the transaction. The Leighton Group, a building, construction and property development group, has committed to occupying 76% of NLA for a period of 10 years after completion and has also provided a 4-year rental guarantee for any vacant space at the property.
Balancing growth and overseas risks. Strategically, we think the deal strikes a balance between buying growth vs taking on overseas diversification risks. While the timing of the deal was surprising, the venture was not, given the limited number of acquisition offerings in Singapore on much slimmer yields versus the high initial NPI yield of 6.9% of the asset on completion. Post this transaction, Suntec’s AUM will increase to $$8.4bn. An estimated 6% and 9% of Suntec’s NAV and revenue respectively will be derived overseas. Whilst there is no overseas exposure target indicated, we believe Singapore will remain very much a core market for the REIT. In terms of financial impact, Suntec is expected to enjoy a small positive DPU carry of 0.4-2% during the construction period and a higher 5-6% boost to DPU, when completed in 2016. Assuming the transaction is fully paid upfront, see-through gearing could reach c42.2% when completed and assuming no revaluation of the existing portfolio and new property. However, the deal is well-structured and the immediate impact on gearing is modest, given the progressive payment nature during construction. This negates the need for an immediate equity fund raising.
Maintain Buy. We retain our Buy call for Suntec with TP of $1.80. We think the deal is likely to refocus investors’ attention to the stronger growth prospects of the REIT from the inbuilt rental escalations as well as the earnings boost from the progressive completion of the Suntec Mall AEI. At the current price, the REIT is trading at 5.7-5.9% FY13-14 yields and offers a total return of 19%.