Accretive acquisition of two Australian assets

• Suntec REIT recently announced the acquisition of 21 Harris Street (21HS) in Sydney (expected physical completion 1Q20, 5.5% initial NPI yield), and 55 Currie Street (55 CS) in Adelaide (8% NPI yield). Both assets are accretive to FY18 DPU assuming a 40:60 (debt:equity) mix. WALE is relatively long at 10.2 years and 4.4 years with built-in annual rent escalations of 3-4%. These acquisitions will be funded from recent private placement proceeds of SGD200m.
• We are positive on these acquisitions as they should provide much-needed earnings stability. Post acquisition, Australia will account for 23% of AUM. Suntec REIT is expected to focus on overseas acquisitions in the medium term.

Development assets contributions to kick-in from 2H20

• One of the key drags in Suntec’s earnings has been interest payments for its assets currently under development. The assets – 9 Penang Road (9PR), Olderfleet, and 21HS – are slated for completion by 1H20, and should start positively contributing to earnings, boosting organic DPU.
• The office component of 9PR has been 100% pre-committed to UBS on a long lease, while Olderfleet has secured commitment for 82.5% of its space with additional heads of agreement signed for 8.4%. This should contribute to healthy organic DPU growth from 2021, aided by built-in rental escalations for these assets.

DPU and Target Price adjustments.

• Our FY19F-21F DPU are lowered by 2-3%, mainly due to lower capital gains distribution assumed.
• With better earnings clarity, we cut our COE assumptions by 60bps, resulting in a higher Target Price.