Monday, November 18, 2013

Suntec REIT - Maiden voyage

What Happened 
Suntec REIT announced recently, that it will acquire a 31-storey, A-grade commercial tower, located in the North Sydney’s CBD area, for a total price of A$413.19m (S$481.3m). The property, targeted for completion in early 2016, is expected to have a NLA of 423,915 sqft, 100% pre-commitment, with Leighton Group - one of Australia’s largest property development group, taking a head lease of 76% of property’s NLA with a weighted average lease to expiry of c.10 years. Concurrently, Leighton Holdings will also provide a four-year rental guarantee for any vacant space upon completion of the property. During the construction phase, the property will be underpinned by a coupon payment of 6.32% yield p.a and an initial yield of 6.89% upon completion. With the acquisition being funded via a S$500m facility management guided this transaction to be yield accretive, and will increase DPU by c.4.7%.   
What We Think 
Although we like this acquisition for its high yield, with SUN’s net gearing currently at 37.2%, we believe it could potentially rise to c.41.0% post acquisition (42.5% post-Phase 3 AEI at Suntec City). A higher net gearing and foreign exchange fluctuation exposure could potentially mitigate the uplift in DPU. In addition, based on our estimates, an initial yield of 6.89% translates to an expected rental rate of A$7psf/mth – higher than the average A$5-6psf/mth in downtown Sydney. Having said that, the true impact on risks and DPU will be clearer after the upcoming briefing. 

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