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

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

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.

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.

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.

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.

We tweak our Suntec REIT's FY21-22F DPU up by 0.94-5.64% to factor in contributions from the new acquisition and assume the purchase is fully debt funded. Accordingly, our DDM-based Suntec REIT target price is raised to S$1.73.
Suntec REIT is trading at FY20-21F dividend yield of 4.7-6.1%.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.
We like the location and quality of the Nova properties but think that Suntec REIT’s higher gearing could be a drag on near-term share price performance.
Re-rating catalyst could come from better clarity on its acquisition funding strategy.
Downside risks: higher-than-estimated rental waivers to retail tenants.

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