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
|
http://www.rhbinvest.com.sg/
2017-07-27
RHB Invest
SGX Stock
Analyst Report
1.75
Up
1.530
