Suntec REIT (SUN) is unlocking value with its divestment of 9 Penang Road, note CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei.
This follows a June 16 announcement that SUN had divested its 30% stake in 9 Penang Road to its existing JV partner, Haiyi Holdings Pte Ltd, at an agreed property value of $295.5 million ($2,468 per sq ft) or at an implied stabilised net yield of 3.3%.
The property has a total net lettable area of 399,000 sq ft with a committed occupancy of 98.7% as at March 2021. The agreed property value is 5.7% higher than the average May 2021 valuation of $931.8 million and 30.3% higher than the total development cost of $756 million.
In response to the divestment, Lock and Eing are maintaining “add” on the REIT with an unchanged target price of $1.76.
“The sale is in line with SUN’s active portfolio management strategy in a bid to improve its financial flexibility,” notes Lock and Eing in a June 16 note.
Post-sale, SUN’s assets under management (AUM) will dip slightly to $11.5 billion. Its portfolio will remain largely Singapore-centric, with 75% of its portfolio value located in the country, note Lock and Eing.
“Its exposure to the more stable office segment is maintained, with office assets making up 77% of AUM and 80% of total income contribution,” they add.
The deal will improve financial flexibility and lower gearing, note Lock and Eing. “In terms of financial impact, the deal is expected to be net asset value (NAV) accretive, lifting its end-December 2020 book value (BV) by 0.1% to $2.057. SUN will realise a divestment gain of $66.5 million and net proceeds of $88.2 million from the sale.”
See: Suntec REIT divests stake in 9 Penang Road property for $295.5 mil
“The net divestment proceeds are intended to be used to pare down debt or be redeployed to higher-yielding assets. Assuming the former, gearing is expected to decline by 1.5% to 42.9% (as at March 2021) and is likely to trend down further assuming proceeds from the recent $150 million perpetual securities issuance is utilised to further reduce debt, in our view,” write Lock and Eing.
Similarly, RHB Group Research analyst Vijay Natarajan is maintaining “buy” on the REIT with a target price of $1.72. “Suntec REIT announced the anticipated divestment of its stake in 9 Penang Road (9PR) at a healthy premium to its latest valuation. We expect the market to react favourably, as the move addresses the key issue of its high gearing level by unlocking value from a stabilised asset,” he writes in a June 17 note.
The office component of 9PR is fully leased to UBS AG on a long-term lease, thereby offering minimum income growth potential, notes Natarajan.
“The move addresses a key investor concern on its high gearing level of 44.4% (pre-transaction), which is one among the highest among the S-REITs. Assuming the divestment proceeds are fully used to pare down debt, its gearing will decrease to 42.9%,” notes Natarajan.
Suntec REIT also recently issued $150 million of perpetual securities at a 4.25% annual coupon rate, to enhance its financial flexibility. This, in turn, should lower its gearing further to approximately 42%, he adds.
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“Management continues to be on the lookout for potential acquisition opportunities, with a focus on office assets and its existing key markets. Separately, it is also looking at potential redevelopment options for Southgate Complex, and to reposition some of its convention space to extract better value,” writes Natarajan.
Singapore has started to relax some of its movement restrictions since the start of this week, and a further phased opening is expected in the coming weeks, says Natarajan. “We anticipate the demand for leases to recover and grow in 2H2021. While the retail and convention segments are expected to remain weak, Suntec City mall’s strong attributes and management’s proactive tenant engagement should mitigate some of the impact.”
As at 2pm, units in Suntec REIT are trading flat at $1.48.
