Thursday, November 21, 2013

Suntec REIT: Foray into overseas market (OCBC)

Suntec REIT:
Fair value S$1.90
add: 12m dividend forecast S$0.091
versus: Current price S$1.57
Foray into overseas market

Suntec REIT announced last Fri that it is seeking to acquire a 100% interest in 177-199 Pacific Highway for A$413.19m (~S$483.4m). While we are surprised by the timing of the acquisition and Suntec REIT’s move into the overseas market, we see several positives in the investment. First, as the transaction is expected to be earning accretive, this may reduce/eliminate the need to dip into CHIJMES sales proceeds to mitigate the temporary decline in DPU due to Suntec City asset enhancement. Second, the property is 100% pre-committed with the Leighton Group taking a head lease of 76% of the NLA for an average lease term of ~10 years. As such, the arrangement provides income certainty and stability to Suntec REIT. Lastly, the acquisition will be fully funded by a S$500m five-year unsecured loan facility. This dispels market fears of an equity fund raising. We raise our fair value to S$1.90 from S$1.85 after factoring the acquisition. Maintain BUY on Suntec REIT.


Proposed acquisition of landmark office tower
Suntec REIT announced last Fri that it is seeking to acquire a 100% interest in 177-199 Pacific Highway for A$413.19m (~S$483.4m), confirming the 14 Nov news by The Australian on the potential acquisition. The property is a 31-storey, Grade A freehold office tower under development and is located in one of the most prominent sites in North Sydney CBD, Australia. The tower, estimated to have 423,915 sqft NLA, is slated for completion in early 2016, and will be well-served by both major roadways and public transport.

Purchase to be earnings accretive
While we are surprised by the timing of the acquisition and Suntec REIT’s move into the overseas market, we see several positives in the investment. First, the transaction is expected to be earning accretive, as Suntec REIT will receive coupon payments at a yield of 6.32% p.a. on the progressive payments made during the construction, and a NPI yield of 6.89% upon completion of the property (adding ~0.45 S cents to DPU). Hence, this may reduce/eliminate the need to dip into CHIJMES sales proceeds to mitigate the temporary decline in DPU due to Suntec City asset enhancement. Second, the property is 100% pre-committed with the Leighton Group (Australia’s leading contractor and property development group) taking a head lease of 76% of the NLA for an average lease term of ~10 years. In addition, Leighton Holdings will provide a rental guarantee for four years for any vacant space upon completion. As such, the arrangement provides income certainty and stability to Suntec REIT. Lastly, the acquisition will be fully funded by a S$500m five-year unsecured loan facility. This dispels market fears of an equity fund raising (probably resulting in Suntec REIT’s 5.2% decline in unit price WoW).

Maintain BUY
We expect Suntec REIT’s gearing level to trend towards 41% after financing the total purchase cost. However, expected asset revaluation gains in 2013-15 are likely to provide some relief. We raise our fair value to S$1.90 from S$1.85 after factoring the acquisition. Maintain BUY. Potential risks to our forecasts include continued weakness in AUD and higher interest costs.


Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 18/11/13

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