Suntec REIT - UOB Kay Hian 2020-10-12: Maiden Acquisition In The UK


Suntec REIT - Maiden Acquisition In The UK

  • Nova Properties provides an NPI yield of 4.6% which is attractive, given its prime location at the West End of London. However, Suntec REIT's share price trades at a 31% discount to NAV and aggregate leverage is already high at 41.3%.
  • Assuming Suntec REIT issues 286m units at S$1.35 each (10% discount to assumed unit price of S$1.50) through a private placement in mid-21, we estimate that the equity fundraising exercise would dilute 2022F DPU by 5.4%.
  • Nevertheless, Suntec REIT provides an attractive 2021F dividend yield of 6.5%. Maintain BUY. 

Suntec REIT expands into third country beyond Singapore and Australia.

  • Suntec REIT (SGX:T82U) has entered into a sale and purchase agreement with the Canada Pension Plan Investment Board to acquire a 50.0% interest in two Grade-A office buildings in the UK for £430.6m (S$766.5m). They are known as Nova Properties, comprising Nova North, Nova South and The Nova Building. It has total NLA of 559,000sf and a long leasehold tenure of 1,042 years.

Prime location in London’s main commercial centre.

  • Nova Properties’ buildings are located at Victoria, the West End of London, near key landmarks such as the Buckingham Palace, Westminster Abbey and the Houses of Parliament. The buildings are opposite the Victoria Station, an important interchange for the London Underground network and Victoria Coach station. Victoria Station is the second busiest railway station in the UK with direct train linkage to Gatwick Airport.

Attractive NPI yield considering prime location.

  • Nova Properties provides a net property income (NPI) yield of 4.6% based on passing income in Jun 20. This is more attractive than the prime office yield of 4.0% for West End, London based on recent transactions of office properties of more than £125m. This is also more favourable than the prime office yield for other key European cities, such as Madrid (3.4%), Amsterdam (3.0%), Frankfurt (2.9%) and Paris (2.8%).

Long WALE provides income stability.

  • Nova Properties’ buildings are 100% occupied by quality office tenants from diversified sectors with a weighted average lease to expiry (WALE) of 11.1 years based on passing income. Key office tenants include Atkins, The Argyll Club, a government ministry, Vitol and BlueCrest Capital Management (office tenants accounted for 90% of total rental income). There is no lease expiry from 2020 to 2026 for both office and retail space.
  • The acquisition is subject to Suntec REIT's unitholders’ approval at the EGM which is expected to convene in Dec 20.

Increase geographical diversification.

  • Suntec REIT's AUM will grow from S$10.7b to S$11.5b across a total of 10 properties in Singapore (77.2% of AUM), Australia (16.1% of AUM) and the UK (6.7% of AUM). SUN intends to deepen its presence in Australia. It plans to expand the allocation to overseas markets to 30-40% of AUM in the next 3-5 years (current: 16%).
  • Suntec REIT continues to explore strategic investments in other key gateway cities, such as Seoul, Tokyo, London, Paris, Frankfurt, Berlin and etc.

Accretive if funded by debt or perpetual securities.

  • Management estimated that the acquisition provides DPU accretion of 4.9% upon completion in Dec 20 assuming that it is fully funded by debt (up to £200m loans denominated in GBP to provide a natural hedge).
  • Suntec REIT’s aggregate leverage is 41.3% as of Jun 20. We estimate that aggregate leverage would increase to 43.2% if the acquisition were fully funded by debt.
  • Management estimated that the acquisition provides DPU accretion of 2.5% if it is funded by issuance of perpetual securities.

Not accretive if funded by equity.

  • Suntec REIT’s unit price of S$1.42 is at a 31% discount to NAV/share of S$2.06. We have assumed that Suntec REIT would issue 286m units at S$1.35 each (10% discount to assumed unit price of S$1.50) through a private placement in mid-21. We estimated that the equity fund raising exercise would dilute 2022F DPU by 5.4%.

Earnings revision

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.65 DOWN 1.720