SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT - Maiden Foray Into London’s Commercial Market
- Suntec REIT (SGX:T82U)’s proposed UK acquisition intends to offer better income stability amidst an uncertain macroeconomic environment, with asset boasting a long WALE of 11 years. We believe the REIT is likely to issue perpetual securities (perps) to fund part of the acquisition and alleviate gearing concerns.
- Suntec REIT's 2H20F earnings should be better than 1H20 with the recent completion of three development assets and a gradual recovery of Singapore’s retail sector.
Diversifying into the UK with acquisition of a 50% stake in Nova Properties
- Suntec REIT is diversifying into the UK with acquisition of a 50% stake in Nova Properties comprising two Grade-A office buildings with ancillary retail. The stake will be acquired from the Canada Pension Plan Investment Board for £430.6m (~S$766.5m), representing a 1.2% discount to its latest valuation and initial NPI yield of 4.6% (in line with recent transactions).
- Key merits of deal in our view are its 100% occupancy with long weighed average lease to expiry (WALE) of 11.1 years (WALB > 10 years) vs Suntec REIT's office portfolio WALE of four years, offering good income visibility amid COVID-19 uncertainty.
- Post-acquisition, the UK will account for 7% of Suntec REIT's enlarged portfolio, comprising Australia (16%) and Singapore (77%).
- Management noted that more overseas acquisitions are likely in the medium term (30-40% of total assets) due to tighter market yields in Singapore. The deal is subject to unitholder approval and expected to be completed by Dec 2020.
We expect perps issuance in the near-term.
- The deal will be fully debt funded with a combination of GBP and SGD loans (46%/54%) with blended funding costs expected at ~2.6%. Based on a 100% debt funding, the transaction is DPU accretive ie 4.9% to 1H20 annualised DPU. Still, gearing post completion is expected jump to 45.2% from 41.3% – a likely concern to investors.
- Management noted that it will consider issuing perps or equity in the near-term to bring down gearing to 40-42%.
- We expect Suntec REIT to raise SGD 300-400m via perps as funding costs are much lower and there seems to be a return of investor appetite for such instruments
Trading performance of retail and office market improving.
- Tenant sales at Suntec City mall are now 70% of pre-COVID-19 levels, while office portfolio remains resilient. Based on current market conditions, Suntec REIT does not see the need to provide blanket rental rebates ahead and is likely to distribute 1H retention income of SGD10.3m in the coming quarters. Management also noted that it will restart its capital distribution programme if market conditions continue to improve.
- 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 revise our Suntec REIT's FY20F-22F DPU by -2% to 2% factoring in the acquisition and associated funding costs. Keep BUY with new SGD1.79 Target Price, from SGD 1.78, 26% upside and c.5% yield.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-10-12
SGX Stock
Analyst Report
1.790
UP
1.780
