Suntec REIT - CIMB Research 2016-08-08: Second foray into Australia

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Second foray into Australia

Acquisition implies c.5% acquisition cap rate. Not cheap but DPU-accretive.
Southgate Complex, Melbourne is a freehold, landmark waterfront integrated development comprising two A-Grade office towers and a three-storey retail podium.
Earnings upside from a buoyant Melbourne office market and backfilling of unoccupied spaces.

Upgrade SUN from Reduce to Hold after recent share price correction with a slightly higher target price. We lift FY17-18F DPU by 1.2% on the back of the acquisition.

Via its 50% interest in Southgate Trust, SUN has entered into an agreement to acquire 50% interest in Southgate Complex (Southgate) for A$289m from Dexus Southgate Trust (Dexus).
The price is in line with open market valuation (A$578.8m) and implies c.5% acquisition cap rate. Total cost for SUN is A$144.5m. As properties in Melbourne are going through cap rate compression, we do not think the acquisition is on the cheap.
Southgate Trust is held by SUN and PIP Trust. ARA Fund is Manager of PIP Trust.

Located alongside the Yarra River in the Southbank arts and leisure precinct of Melbourne, Southgate complex is a freehold, landmark waterfront integrated development comprising two A-Grade office towers, a three-storey retail podium and a car park with 1,026 lots. The office and retail components make up 87% and 13% of the total NLA (c.820k sq ft).
Southgate has a committed occupancy of 88% with a WALE of 4.6 years. The annual rental escalations for the office leases are 3-4%.

Separate put and call options have been entered into with Dexus where the remaining 50% interest in Southgate Complex (Tranche B) will be acquired for the same purchase consideration of A$289m (refer to overleaf for details).

We understand that SUN could be looking at fully S$-denominated debt to fund the acquisition. With an estimated cost of debt at low-2% vs. the initial NPI yield of 5%, the acquisition is expected to be DPU-accretive.
Post-acquisition, look through gearing is expected to increase from 36.1% to c.37%. With a buoyant Melbourne office market, under renting at some of its office leases and potential backfilling of unoccupied spaces, we foresee further earnings upside from Southgate.

Post 2Q16 results, SUN has corrected by c.6%. We upgrade SUN to Hold as we now project a total return of 5.5% for 2016.
Modeling in contribution Southgate from mid-Nov 16 onwards, we lift our FY17-18 DPU forecasts by 1.2%. With the DPU uplift, our DDM-based target price is also raised slightly (from S$1.67 to S$1.68).
In our view, new income boosters from 177 Pacific Highway (which has received practical completion) and Southgate could counterbalance the weakness in Suntec Mall.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-08-08

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