Suntec REIT - RHB Invest 2017-07-27: Strengthening Its Presence In Australia

Suntec REIT - RHB Invest 2017-07-27: Strengthening Its Presence In Australia SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Strengthening Its Presence In Australia

  • Suntec REIT’s 2Q17 results are within our expectations. Its acquisition of a 50% stake in a prime, Grade-A office asset in Melbourne is a long-term positive that would provide earnings stability and growth. However, negative rental reversions are likely to persist in the near term, from leases expiring in its retail and office properties. 
  • Suntec REIT's near-term share price performance should be supported by its potential to be included in the FSSTI
  • The stocks offers FY17F-18F yields of 5.2%, which we deem as fair on account of its risk-reward profile. 
  • NEUTRAL, with a SGD1.75 Target Price (from SGD1.53, 9% downside). 

Acquires 50% of Olderfleet, Melbourne. 

  • This to-be-developed property sits on freehold land at Olderfleet, 477 Collins Street, Melbourne. The purchase price (50% stake) of AUD414.2m is on par with its latest valuation, and translates into ~AUD1,327 psf of NLA. Mirvac will be the co-owner (ie the other 50% stake) and developer of the property. The property is currently 39.1% pre-committed by Deloitte Australia. 
  • The acquisition should be completed by 3Q17, and construction is scheduled to be completed by 3Q20. After the acquisition, the REIT’s Australian assets would make up ~12% of its total portfolio.

Yield-accretive, based on 100% debt funding. 

  • The REIT expects to fund the acquisition wholly via debt (borrowed in SGD terms, but converted to AUD). It also estimates the acquisition to be yield-accretive (1.8%) on its pro-forma FY16 DPU. 
  • Payment would be made in tranches, based on construction progress, with Suntec REIT receiving a coupon rate of 4.8% pa on its payments, and inbuilt rental escalations of 3.5-3.75% pa. Mirvac would also provide a 5-year rental guarantee on any unlet space.

Potential candidate for inclusion into the FSSTI. 

  • Suntec REIT is currently the highest-ranking counter by market capitalisation in the STI reserve list. A potential privatisation of Global Logistics Properties would result in Suntec REIT replacing it in the FSSTI. 
  • The inclusion of the stock would also lift the demand for the stock, and this may support its share price in the near term.

Negative rental reversions likely to stay. 

  • The REIT signed a total of 118,000 sqf of office leases (23% new) and 152,000 sqf of retail leases (36% new) in 2Q17. Management noted that rental reversions were mixed, and were slightly negative overall. 
  • About 30.7%/24.3% of retail/office leases respectively are due for renewal by 2018, for which we expect negative rental reversions of 2-5%. 
  • On the flipside, Suntec City Mall’s operational performance continued to improve, with a committed occupancy rate of 99.3% (+0.9 ppt QoQ). Shopper traffic and tenant sales also grew 11% YoY and 5.3% YoY respectively.

Maintain NEUTRAL, with a higher TP of SGD1.75. 

  • We make no changes to our earnings estimates, while we await further details on the payment structure for the Olderfleet acquisition. 
  • We fine-tune our DDM model by adjusting our CoE to 7.5% (from minus 6.7%) and terminal growth assumption to 2% (vs 0% previously) due to its improved earnings visibility. 
  • Key share price catalysts are its inclusion into the FSSTI and making more yield-accretive acquisitions.

Vijay Natarajan RHB Invest | 2017-07-27
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.75 Up 1.530