Suntec REIT - CGS-CIMB Research 2021-06-30: Actively Managing Its Portfolio

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Actively Managing Its Portfolio

Suntec REIT (SGX:T82U) is divesting Suntec Office strata office space, buying UK office building.
Its active portfolio management should boost DPU and NAV, in our view.
Reiterate ADD rating on Suntec REIT, with a higher DDM-based target price of S$1.79.

Suntec REIT announced the divestment of 78,491 sq ft of strata office space at Suntec Office for S$197m, at 8.9% above valuation.
At the same time, Suntec REIT also announced the acquisition of The Minster Building in London, a Grade A office property with ancillary retail, for £353m (S$667m), or at a 4.6% discount to valuation. The latter has a net lettable area of 293,398 sq ft and a 96.7% committed occupancy (with a long weighted average lease to expiry of 12.3 years). The acquisition comes with a two-year income guarantee for vacant spaces and retail leases, as well as a 1-year income guarantee for co-working lease.
The property has a diversified tenant mix, with key tenants such as Charles Taylor, Lyst, Trustpilot and Spaces. The acquisition is expected to complete in Jul 2021, while the divestment is expected to be concluded in 3Q21.

The transactions are in line with Suntec REIT’s active capital management and recycling strategies. Year-to-date, Suntec REIT has divested 9 Penang Road and Suntec Office strata space (3.1- 3.3% yield) and recycled capital into higher yielding properties such as The Minster Building (4.5% net yield).
Post the three transactions, Suntec REIT’s portfolio AUM would increase to S$11.7bn, with its exposure in UK making up a larger 12.5%. Singapore assets still account for the largest portion (70%) of AUM. The proportion of income derived from office assets is also expected to increase to 85.4% from 84.8%.

The acquisition of The Minster Building is expected to be funded with the proceeds from the the sales of 9 Penang Road and Suntec Office strata space (S$280m), part of the proceeds from a perpetual securities issuance (S$70m) and onshore debt of £175m.
In terms of financial impact, the transactions are expected to boost NAV/unit by 0.7% and lift Suntec REIT's DPU from operations by 3.6%.
Suntec REIT's gearing is also projected to decline to 43.8% (vs. 44.3% as at Dec 2020). Management guided that it would continue to assess its balance sheet metrics and could potentially undertake more capital management strategies, including divestments and further perpetual securities issuance.

We adjust our FY21-23F DPU estimates for Suntec REIT by 1.3-6.1% to take into account the two divestments, as well as to factor in the acquisition of The Minster Building. Accordingly, our DDM-based target price for Suntec REIT is raised to S$1.79.
We maintain our ADD call on Suntec REIT.
See
Re-rating catalyst: faster-than-expected recovery of its retail and convention business from COVID-19 disruption.
Downside risk: higher-than-estimated rental waivers to tenants.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-06-30

SGX Stock Analyst Report ADD MAINTAIN ADD 1.79 UP 1.760