Maiden Down Under acquisition. Suntec has entered into agreements to acquire 177-199 Pacific Highway, a freehold land and property to be developed for a consideration of AUD413.19 (~SGD490m). This 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 sq ft. It is located in one of the most prominent sites in North Sydney Central Business District at the junction of Pacific Highway and Berry Street and enjoys direct access to a number of major surrounding roadways and is well served by public transport (5-minute walk from North Sydney station.)

100% pre-leased. The project is 100% pre-committed with the Leighton Group, one of Australia’s largest building, contracting and property development group taking a head lease of 76% of the NLA and WALE (weighted avg lease expiry) of approximately 10 years. The building will be home to Leighton Holdings’ corporate HQ. Leighton Holdings will also provide a rental guarantee for four years for any vacant space on completion.

Yields are attractive ... Upon completion, the initial NPI yield is 6.89% and there will be coupon payments of 6.32% per annum payable to Suntec during the construction (on the progressive payments made to the vendor). The acquisition will be fully debt-funded by a SGD500m 5-year unsecured loan facility provided by Commonwealth Bank of Australia, DBS and Standard Chartered. Vis-à-vis Suntec’s existing FY12 portfolio yield of ~3.6%, the Australian acquisition does appear favourable with near term borrowing costs unlikely to surpass the ~6% range, thus generating positive carry on this transaction (excl. forex considerations).

… but strategic focus and forex risk in question. Nonetheless, we remain leery of future forex risk on both income streams (revenue in AUD but distribution paid in SGD) and balance sheet (asset purchased in AUD but loan facility in SGD). The AUD is closely tied to the commodity cycle and demand from China. 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). The aggregate leverage will also escalate to 42.3% from current 38.6%, making it the second highest-geared S-REIT after Kep REIT. We believe that the market would react negatively to this given the abovementioned overhangs and also acquisition in a rising interest rate environment, which tends to correlate with higher cap rates and lower property values. Maintain BUY with a reduced TP of SGD1.83. Suntec is now trading at forward-DPU yield of 5.9% and P/B of 0.76x

Source: Maybank Kim Eng Research - 18 Nov 2013