Suntec REIT

Suntec REIT makes its foray into its first overseas acquisition, after the REIT announced that it has entered into an agreement to acquire 177-199 Pacific Highway, a freehold land and property to be developed for a consideration of A$413.19. The property, is a 31-storey A grade state-of-the-art commercial tower which is targeted for completion in early 2016 with NLA of 423,915 sf. Scheduled for completion by early 2016, the property is 100% pre-committed, with a WALE of ~10 years coupled with annual rental escalations. The Leighton Group, one of Australia’s largest building, contracting and property development group will be taking a head lease of 76% of NLA. Leighton Holdings will also provide a rental guarantee for four years for any vacant space on completion. With an initial NPI yield of 6.89% upon completion, Suntec REIT will be paid a coupon yield of ~6.32% p.a. during the construction period, which compares favorably to the REIT’s yield of 5.9% - 6.2% for FY13/14. The acquisition will be fully debt-funded by a $500m 5-year unsecured loan facility. Vis-à-vis Suntec’s existing FY12 portfolio yield of ~3.6%, the Australian acquisition does appear favorable with near term borrowing costs unlikely to surpass the ~6% range, thus generating positive carry on this transaction (excl. FX considerations). Maybank-KE remains leery of future FX risk on both income streams and balance sheet. Note that the AUD is closely tied to the commodity cycle and demand from China, while Suntec has not mentioned that these have been hedged. In addition, the viability of its geographic expansion strategy remains to be seen with one acquisition in Australia (~5.6% of GAV). Aggregate leverage will also escalate to 42.3% from 38.6%, making it the second highest-geared S-REIT after Kep REIT. Overall, believe that the market would react negatively given the abovementioned overhangs, and also acquisition in a rising interest rate environment. The house maintains BUY with a reduced TP of $1.83. Suntec now trades at forward-DPU yield of 5.9% and P/B of 0.76