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

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






OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-10-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.570 SAME 1.570



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