Suntec REIT - UOB Kay Hian 2019-07-10: Continued Expansion In Australia

SUNTEC REAL ESTATE INV TRUST (SGX:T82U) | SGinvestors.io SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Continued Expansion In Australia

  • The proposed acquisition of 21 Harris Street in Sydney, Australia will deepen Suntec REIT (SGX:T82U)’s Australia exposure from 11% to 14% of its total AUM. The acquisition is expected to be DPU-accretive (boosting pro-forma FY18 DPU by 0.5%). The transacted price is fair and in line with the independent valuation by JLL.
  • Maintain HOLD with a higher target price of S$2.00 (previously S$1.99). Entry price: S$1.82.



WHAT’S NEW


Acquisition of 100% interest in FH, a Grade A office building at 21 Harris Street, Pyrmont, Sydney, Australia.

  • The property is a campus-style Grade A 9-storey commercial office with three basement levels, and is expected to achieve practical completion in 1Q20. The property has a total NLA of 203,400sf, comprising office NLA 181,900sf (89%) and retail NLA 21,500sf (11%), as well as 170 car park lots. It is located at John Street Light Rail Station, which connects to the Central Train Station.
  • The property has a 91.2% pre-commitment, long WALE of 10.2 years, and is anchored by Publicis Groupe (a global communications and marketing company with a Sydney HQ). Remaining pre-committed spaces are leased to Campfire (an international co-working operator), a childcare centre and a gym operator. Acquisition is due to complete in 1Q20 after practical completion.


STOCK IMPACT


Deepens Suntec REIT's presence in Australia to 14% of total AUM

  • Deepens Suntec REIT's presence in Australia to 14% of total AUM (from 11%). This is in line with management's strategy to deepen the company’s presence in existing geographical locations.

Project cost of A$307.7m (S$295.4m).

  • This the purchase (A$119m), development (A$178m), acquisition payable Manager (A$2.97m) cost (A$7.75m). Development be by Group.
  • Transacted fair (A$297m) and in with independent the completed project JLL, based on method capitalisation. The is A$297m (A$119m in price, and A$178m in expected).

Acquisition outlay to be funded by a mix of Australian-dollar debt and equity.

  • The Australian-dollar bank borrowing is to provide a natural currency hedge.

Expected DPU accretion of 0.5%.

  • Based on FY18 pro-forma financials, the transaction is expected to be DPU-accretive (boosting FY18 DPU by 0.5%), but NAV dilutive (-0.8%).
  • The property has an initial NPI yield of 5.5% with annual rent escalation of 3-4% (including a 3- year rental guarantee based on market rents on unlet office spaces).


EARNINGS REVISION/RISK

  • We raise our 2020-21 DPU forecasts by 0.6%, after factoring in fresh contributions from the acquired property.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a higher target price of S$2.00 (previously S$1.99), based on DDM (required rate of return: 6.25%, terminal growth: 1.5%). Entry price is S$1.82.


SHARE PRICE CATALYST

  • Contributions from yield-accretive acquisitions.
  • Positive newsflow on office and retail capital values, AEI, tenant movements and renewals, rentals and occupancy.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.00 UP 1.990



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