Suntec REIT - RHB Invest 2016-08-08: Opportunities Down Under: Second Milestone

Suntec REIT - RHB Invest 2016-08-08: Opportunities Down Under: Second Milestone SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Opportunities Down Under: Second Milestone

  • We estimate Suntec REIT’s accretive acquisition of a 25% attributable interest in Southgate Complex, Melbourne, to boost FY16F-20F DPU by 1.4-1.6%, with an initial net property income yield of 5%. 
  • While it lifts our TP modestly to SGD1.53 (from SGD1.50), we think valuations are still rich, and anticipate more downside risks ahead with the lacklustre scene of Suntec City Retail
  • Upgrade to NEUTRAL (from Sell).

JV acquisition through Southgate Trust

  • The joint venture (JV) acquisition is made through Southgate Trust, in which Suntec REIT holds a 50% indirect interest, which then acquired a 50% interest in Southgate Complex from Dexus Property Group (Dexus). Suntec REIT’s total consideration for the current 25% stake of AUD154.9m is fully debt-funded. According to Dexus’ website, the book value of the property (100% stake) is AUD482.2m as at Dec 2015, vis-à-vis JLL Research’s latest open market valuation of AUD578.8m. With this acquisition, Australia accounts for about 7% of Suntec REIT’s total portfolio.
  • Southgate Complex is a freehold, landmark waterfront integrated development comprising two A Grade office towers, a 3-storey retail podium and a car park with 1,026 lots. The office and retail components constitute approximately 87%/13% of the total net lettable area. Surrounded by business, residential, recreational and retail amenities, the asset is directly opposite Flinders Street train station and within close proximity to Melbourne’s city rail loop.
  • It has a total net leasable area (NLA) of 820,324 sq ft and is leased to well- established tenants such as IBM, The Herald and Weekly Times, Commonwealth of Australia Bank, APT, Dairy Australia, City Road Melbourne and LinkedIn. The committed occupancy was 88% as at 5 Aug, with a weighted lease expiry of approximately 4.6 years. The annual rental escalations for the office leases are predominantly between 3% and 4%.

Call/put option. 

  • In addition, separate put and call option agreements have been entered into with Dexus, where the remaining 50% interest in Southgate Complex can be acquired for the same purchase consideration of AUD289m. 
  • This first put option for Dexus is for the period of 480 days following the completion of the initial 50% JV acquisition, subject to the receipt of a no objections notification from the Australian Foreign Investment Review Board (FIRB).

Stay on the side-lines for now. 

  • Suntec REIT’s share price has corrected since Brexit and concerns over falling passing rents at Suntec City Retail (below the SGD12 mark for the first time in 2Q16 and 8% below its initial target of SGD12.59 per sq ft/month). At this level, we think it is approaching our TP, with a total return of -3.5%. 
  • On valuation grounds, we thus raise our call to NEUTRAL, fine-tuning our TP slightly higher to SGD1.53
  • The key risk is its Australia portfolio, which lacks scale as it constitutes less than 10% of total assets.

Ong Kian Lin RHB Invest | 2016-08-08
RHB Invest SGX Stock Analyst Report NEUTRAL Upgrade SELL 1.53 Up 1.500