Suntec REIT - DBS Research 2019-07-16: Maiden Adelaide Acquisition 


Suntec REIT - Maiden Adelaide Acquisition 

  • Acquisition of 55 Currie Street for A$148.3m on initial NPI yield of 8%.
  • In-built annual rental escalation of 3.5-3.75%.
  • Exposure to expected turn in office rents in Adelaide.
  • Maintain BUY, Target Price of S$2.20.

What’s New - Acquisition of 55 Currie Street in Adelaide

  • Suntec REIT (SGX:T82U) announced that it has entered into an agreement to acquire 55 Currie Street.
  • The building formerly known as Allianz Centre is a 12-storey, freehold Grade A office building located in Adelaide, South Australia. The property is situated within the western core of Adelaide’s CBD and is a 5-minute walk to Adelaide railway station. Total net lettable area for the property stands at 282,000 sqft.
  • Purchase consideration for the property is A$148.3m (c.S$145.4m) with total acquisition costs, including acquisition and other professional fees, at c.A$151.5m.
  • The initial NPI yield of 8.0% is inclusive of the vendor providing a 27-month rent guarantee on vacant spaces. We understand the Vendor is Arc Equity Partners which acquired the property in 2011 for c.A$80m and an initial NPI yield of 9.2%.
  • Stripping out the income guarantee, we understand the property is expected to be transacted around the 7.25-7.5% yield, similar to other comparable buildings but higher than 6.85% yield for prime properties as reported by CBRE in 2Q19.
  • The current committed occupancy stands at 91.6% with the key tenants being the Commonwealth Government, South Australian Government, Allianz and Data Action.
  • As at 1 July 2019, the weighted average lease expiry was at 4.4 years.
  • The property has in-built annual rental escalation of between 3.5-3.75%.
  • While completed in 1988, 55 Currie Street has undergone several rounds of refurbishments. The most recent AEI was completed in 2018 and included upgrades to the major mechanical and electrical plant and equipment such as lifts, chillers and building management system. Furthermore, solar panels and end of trip facilities were installed. Its central atrium, lift lobbies and toilets were also upgraded.
  • The acquisition is expected to be completed at end August.
  • Funding for this acquisition will be from the recent S$200m equity raising. Suntec REIT estimates a 0.79% accretion to proforma core FY18 DPU (excluding capital distributions).
  • Post the maiden acquisition in Adelaide (55 Currie Street), recent purchase of 21 Harris Street in Sydney, existing buildings in Melbourne and Sydney and upon completion of the existing projects under development, Australia will represent c.17% and c.23% of Suntec REIT’s assets under management and income respectively.

Our thoughts

  • An additional post 21 is not a surprise as the Harris Street impact from the recent equity raising.
  • While newspaper articles in Australia earlier this year reported that Suntec REIT’s sponsor, ARA Asset Management, was interested in 55 Currie Street, it was unclear whether it was for one of ARA’s private funds or for Suntec REIT.
  • Overall, similar to the 21 which is currently by capital distributions.
  • Nevertheless, we anticipate pushback from some investors given Suntec REIT’s move to what some may consider a secondary city in Australia. Mitigating this risk is the WALE of 4.4 years and in-built annual rental escalations. More importantly, on the back of the increase in public and infrastructure spending as well as sustained investments from the defence, medical and renewal energy industries, the Adelaide economy is expected to be on an upturn. With new entrants such as BAE Systems, Babcock and Boeing, reducing available office stock, vacancy rates are expected to trend down resulting in rising rents going forward, based on JLL estimates.
  • We maintain our BUY call and Target Price of S$2.20.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-16
SGX Stock Analyst Report BUY MAINTAIN BUY 2.20 SAME 2.20