Review on Suntec REIT Proposed Acquisition of 50% Interest in Nova Properties

On 8 Oct, Suntec REIT announced for the proposed acquisition of 50.0% interest in Nova North, Nova South and The Nova Building. These Nova properties are located in Victoria, West End, London, United Kingdom. Let's review this acquisition section by section:

Lease Profile

This acquisition would improve lease profile where portfolio occupancy, WALE as well as weighted average land lease expiry will be improved.

Debt Profile

This acquisition would be funded by internal resources and borrowing. Gearing would increase to 45.2% and unsecured borrowing % would drop. The weighted cost of debt for this acquisition would be 2.58%, slightly lower than the latest cost of debt. 

Diversification Profile

Diversification would be improved where top geographical, top property, top tenant and top 10 tenants contributions would be lowered. However, Suntec REIT would be less diversified in terms of sector, which is heavily focused on the office sector after the acquisition.

Financial Metrics

This acquisition would increase DPU by 0.36 cents per year. It is 4.9% accretive IF based on 1H 2020 DPU before 10% retention. NAV per unit remains unchanged. NPI yield of 4.6% would improve Suntec property yield. There is also 2 years income guarantee for the retail space. 

Author's Opinion

Favorable	Less Favorable
Committed Occupancy Improve	Gearing Increase
WALE Increase	Unsecured Debt % Reduce
More Well-Spread Lease Expiry	Office Sector Weightage Increase
Weighted Average Land Lease Expiry Increase
Cost of Debt Reduce
Top Geographical Contribution Reduce
Top Property Contribution Reduce
Top Tenant & Top 10 Tenants Contributions Reduce
DPU Accretion
Property Yield Improve

Based on available information, there are quite some numbers of favorable points for this acquisition. However, the post-acquisition gearing is high at 45.2%. Unless Suntec REIT is able to get property revaluation gain (especially on 9 Penang Road and Olderfleet) to reduce gearing, else the chances of near term equity fundraising are high. The EGM to seek unitholder approval for this acquisition is expected to be held in December. 

Although the DPU is accretive for this acquisition, let's not forget to review Suntec past DPU. 

	FY2019	FY2018	FY2017	FY2016	FY2015
DPU	9.507	9.988	10.005	10.003	10.002
DPU from Operations	8.57	8.529	8.907	9.057	9.249

From the above table, DPU is more or less the same (besides FY2019), but DPU without capital distribution from asset disposal is dropping. As for 1H FY2020, there is no such capital distribution given. In the current situation, even with this acquisition, it would be challenging for Suntec to have its DPU back to 9.5 cents and above. Hopefully, the upcoming 9 Penang Road and Olderfleet contribution could provide enough income to cover the distribution.

For more information, you could refer to:

SREITs Dashboard - Detailed information on individual Singapore REIT

SREITs Data - Overview of Singapore REIT

REIT Analysis - List of previous REIT analysis posts

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*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Under no circumstances does the information presented on this blog represent a buy, sell, or hold recommendation on any security, please always do your own due diligence before any decision is made.