Suntec REIT - CGS-CIMB Research 2020-10-09: Foray Into London Market


Suntec REIT - Foray Into London Market

  • Enhancing resilience through diversification into London office market.
  • Acquisition is DPU accretive, higher gearing from debt funding.
  • Reiterate ADD rating on Suntec REIT with a higher DDM-based Target Price of S$1.73.

Maiden UK acquisition

  • Suntec REIT (SGX:T82U) announced it has entered into an agreement to purchase a 50% interest in two Grade A office buildings with ancillary retail (Nova Properties) in Victoria, West End, London. See Suntec REIT Announcements.
  • The properties are located opposite the Victoria Station, an important Underground interchange, with a direct train linkage to Gatwick Airport and is situated near key landmarks such as Buckingham Palace, Westminster Abbey and the Houses of Parliament.
  • The Nova properties comprise a total 559,103 sqft of office and retail space, with a long weighted average lease expiry (WALE) of 11.1 years. Its top 10 tenants make up c.70.5% of gross rental income (as at Jun 2020) and are largely from consultancy/ services, energy and natural resources and TMT sectors. They include names such as Atkins, The Argyll Club, Vitol, Bluecrest and BHP Billiton.
  • The purchase is subject to unitholders’ approval and management expects to complete the deal in Dec 2020.

Enhancing portfolio resilience through diversification

  • Suntec REIT (SGX:T82U)’s foray into a new and deep UK commercial property market is expected to enhance its resilience and geographical diversification with Singapore/Australia/UK making up 77.2%/16.1%/6.7% of its enlarged S$11.5bn portfolio value, while portfolio WALE is extended to 4.4 and 2.8 years for its office and retail portfolio, respectively.
  • The purchase price of £430.6m is at a 1.2% discount to independent valuation, translates to an acquisition yield of 4.6% (inclusive of a 2-year guarantee on retail income) and is also on the higher end of recent Central London transaction range of 4.2-4.6%.
  • According to property consultant Jones Lang LaSalle UK, prime rent in the West End is expected to improve in the medium term, underpinned by limited new supply.

DPU-accretive acquisition but gearing increases

  • According to management, the purchase is expected to be accretive, with a proforma 4.9% uplift over Suntec REIT (SGX:T82U)'s 1H20 annualised DPU, assuming it is fully funded by a combination of £ and S$ loans.
  • Post-acquisition book value remains unchanged at S$2.09/unit. However, Suntec REIT’s gearing will likely increase from 41.3% at end-Jun 2020 to 45.2%. While this is on the higher end of the SREIT gearing range, management indicated that it is also exploring various funding options including perpetuals.
  • Suntec REIT intends to hedge at least 50% of its recurring £ income.

Reiterate ADD rating on Suntec REIT

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-09
SGX Stock Analyst Report ADD MAINTAIN ADD 1.73 UP 1.700