SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT - Trading Up Into The UK
Further diversification, Upgrade to HOLD
- Suntec REIT (SGX:T82U)’s acquisition of the Minister Building in London has further diversified its portfolio into more resilient longer WALE Grade A assets and the UK’s stronger growth market, while a divestment of Suntec office units after 9 Penang Road has helped de-gearing efforts.
- We expect Suntec REIT's DPUs to rise 3-4% and will update estimates pending deal closure in 3Q21.
- While its 4%/ 11% underperformance vs peers/ the market year-to-date reflects a weak balance sheet (and its gearing remains high), improving office/retail fundamentals into 2H21, upside from retained capital distributions, and further divestment gains, suggest a more favourable risk-reward, and hence we raise Suntec REIT from Sell to HOLD with a DDM-based target price of S$1.25 (COE: 8.2%, LTG: 1.0%).
Acquires Minister Building in London at 4.5% yield
- Suntec REIT will acquire The Minister Building, a 999-year leasehold, ~293k sf NLA property in the City of London’s CBD, that offers Grade A office space with ancillary retail. It is 96.7% occupied with a long 12.3-year WALE, supported by a 2-year income guarantee for vacant space and retail leases, and 1- year guarantee for its co-working lease (c.13% of NLA).
- The agreed value of GBP353.0m (S$667.2m) is 4.6% below valuation and implies a 4.5% NPI yield. We believe this is attractive versus a 4.0% prime yield for City of London assets and 3.75% for those in the West End.
Divests Suntec office at 3.1% yield
- The divestment of Suntec City office strata units for S$197.0m (S$2,510 psf) at 8.9% above valuation, results in a S$13.9m gain, while implying a 3.1% NPI yield. While this is ~13% below 2020-21 transactions (at S$2,400-3,443 psf), it reflects the lower-floor and portfolio NLA.
- The deal, which follows the S$295.5m sale of its entire 30% interest in 9 Penang Road (at 5.7% premium to valuation) at a 3.3% exit yield that was announced on 16 Jun, reflects another well-timed capital-recycling initiative in our view.
DPU accretion at 3.6% is attractive
- The deal lifts Suntec REIT's AUM by ~2% to S$11.7b and is accretive to DPU (+3.6%) and NAV (+0.7%), given the funding structure (c.40% from the S$280m divestment proceeds, ~50% from GBP-based debt, and perps), while its gearing improves from 44.3% to 43.8%.
- The UK’s contribution will rise from 6.9% to 12.5% of Suntec REIT's AUM, behind Australia (16.8%) and Singapore (70.7%), while its WALE lengthens for office (to 5.55 years) and for retail (to 3.18 years).
- See
Chua Su Tye
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2021-06-30
SGX Stock
Analyst Report
1.250
SAME
1.250
