• Buys Australia office property for A$297m; initial property yield of 5.5%.
• Contributions expected from 2Q20; gearing to remain relatively stable at 38- 39%.
• Maintain ADD with a higher Target Price of S$2.15.

Buys Office Building in Australia

• Suntec REIT (SGX:T82U) has announced the purchase of an office property in Pyrmont, Sydney. It is located 2km west of Sydney CBD and next to the John Street Light Rail Station and has pedestrian access to the CBD via the Pyrmont Bridge.
• Scheduled to complete in 1Q2020, the building has 203,400 sq ft of lettable area and is 91.2% pre-committed with Publicis Groupe as anchor tenant, and a long weighted average lease expiry of 10.2 years. There is also a 3-year rental guarantee for the unlet office spaces.

Accretive Acquisition With a 5.5% Initial Property Yield

• The property has an initial yield of 5.5% based on the completed property value of A$297m (S$285m), with annual rental escalation of 3-4%. The purchase will expand its AUM to S$10.2bn with Australia accounting for a larger 14% of AUM.
• On this acquisition alone, Suntec REIT estimates that the property could boost its operational DPU by 0.49% on a pro-forma basis.

Acquisition to be Completed in 1Q20; Gearing Remains Stable

• Suntec REIT will pay an initial deposit of A$14 of the property. It intends to debt as well as private placement.
• Post-acquisition, g to remain relatively -39%.

Adjusting Earnings and Target Price

• We adjust our FY19F and FY20F DPU by -3.9% and -0.5%, respectively, to pen exercise.
• Additionally, we tweak our DDM valuation cost of equity assumption from 7.3% to 6.9% to reflect the current benign interest rate outlook. As such, our DDM-based target price is raised to S$2.15 (from S$2.06 previously).

Maintain ADD

• Suntec REIT remains amongst our top picks in the SREITs space. We think the share price overhang from unutilised proceeds from the recent placement should be removed post this acquisition. FY19F DPU yield of 5.1% is on the higher end of its comparable peers’ yield range.
• Suntec REIT should also benefit from the continuing office rental upcycle in Singapore.
• Key risks to our call include potential slowdown in office appetite due to slower macro outlook.

Source: CGS-CIMB Research - 1 Jul 2019