Suntec REIT - OCBC Investment 2020-10-12: Diversification Into UK But Potential Equity Funding Raising Looms

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SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Diversification Into UK But Potential Equity Funding Raising Looms

• Maiden entry into London; initial NPI yield of 4.6%.
• Pro forma aggregate leverage to increase to 45.1% if 100% debt funding is used.
• Potential equity fund raising or perpetual security issuance to partially finance this deal.

Proposed acquisition in West End, London, marking its maiden penetration into the city

• Suntec REIT (SGX:T82U) announced a proposed acquisition of a 50% interest in two Grade A office buildings with ancillary retail (collectively known as Nova Properties) located in the heart of Victoria, West End, London, UK for an agreed value of GBP430.6m (~S$766.5m). This marks Suntec REIT’s maiden entry into the London and UK commercial market.
• LSE-listed Landsec will own the remaining 50% of the Nova Properties.
• The buildings are located opposite the Victoria Station, and have a committed occupancy of 100% and a total NLA of ~559,103 sq ft, of which 85.9% is made up of office and 14.1% by retail.

More positives than negatives for now, but equity fund raising risks remain

• Positives from this transaction include
  1. diversification of income streams to a new geography, with UK expected to contribute 6.7% of Suntec REIT’s enlarged portfolio AUM;
  2. initial NPI yield of 4.6% which is expected to provide pro forma DPU accretion of +3.6/4.9% based on FY19/annualised 1H20 results if we assume 100% debt funding;
  3. Long WALE of 11.1 years (WALB ~10 years) with 2-year guarantee on the retail income;
  4. partial debt funding denominated in GBP (~GBP200m or S$356.0m out of total expected loans of S$773.9m) which will provide a natural hedge;
  5. long land tenure of 1,042 years remaining and
  6. joint acquisition with a reputable JV partner.
• However, we believe the negatives are as follows:
  1. given that the acquisition is expected to be fully debt funded, pro forma aggregate leverage is expected to increase from 41.3% to 45.2%, which would be the highest in the S-REITs sector;
  2. risks of asset impairment in 2H20 which would result in aggregate leverage increasing further;
  3. potential of equity fund raising exercise in the future to bring gearing back down.
• Management highlighted that its longer-term aggregate leverage target remains at 42-45%. Besides equity, another funding option could also be the issuance of perpetual securities. This would reduce the accretion level of the acquisition.

Unitholders’ approval required; EGM likely in Dec

• To protect both parties’ interests, Suntec REIT and Landsec have a right of first offer (ROFO) in the event that the other party decides to sell its stake. If Landsec decides to sell its stake and Suntec REIT does not exercise the ROFO, Landsec can only sell the relevant building at a price not lower than 97.5% of the ROFO price and not lower than the independent valuation commissioned by Suntec REIT.
• Unitholders’ approval is required for this proposed acquisition at an EGM, which is likely in Dec.
• 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 maintain our fair value of S$1.57 for Suntec REIT.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-10-12

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