News Analysis: A Grand Finale Fireworks
- ‘Grand finale’ move – doubling down in the City of London after a three-step move over the past month
- Acquisition to be funded by combination of proceeds from divestment of Suntec City Office strata units, as well as the previous divestment of 9 Penang Road and the recent round of issue of perpetual securities
- Successfully recycled assets to generate 3.6% DPU accretion post acquisition and lowered gearing through active capital management
- Maintain BUY; TP of S$1.85
‘Grand finale’ move to double down in the City of London, partially funded by divestment proceeds. Suntec REIT finally reveals its hand after taking multiple preparatory steps over the past month, with the announcement of two concurrent deals. The REIT will be acquiring a Grade A office building in the heart of City of London, The Minster Building, for GBP353m (S$667.2m), which will be partially funded by the divestment of 78k sqft of Suntec City Office strata units for S$197m (S$2,510psf) at 8.9% premium to valuation.
New office building in prime location, long WALE and high occupancy. The Minster Building is strategically located in London CBD, within walking distance to Monument, Tower Hill and Liverpool train stations and is the largest of three buildings within the Minster Court Estate. It currently has high committed occupancy of 96.7% with a long WALE of 12.3 years (9.1 years to WALE break), with no or minimal lease expiries until 2027. It has a 2-year income guarantee for vacant space and retail lease and 1-year income guarantee for co-working lease totalling GBP6.7m. We believe this acquisition could ride on the reopening play of UK as they progressively emerge out of the COVID-19 pandemic with one of the highest vaccination rates globally.
Recycled assets into accretive acquisition and lowered gearing through active capital management. In its three-step move of raising perpetual securities, divesting its stake in 9 Penang Road and finally divesting the Suntec City Office strata units, Suntec REIT has delivered an accretive acquisition – with 3.6% DPU accretion, based on proforma estimates – and reduced its gearing slightly to 43.8%, all without raising equity. This is in line with management’s guidance of not raising equity at below its last equity fund raising exercise price. As such, management has exercised discipline and set the record straight to deliver value for its shareholders, which we believe would bode well for investors if it continues.
Key summary of overall impact from the three-step move:
- Proforma DPU accretion of 3.6%
- Proforma NAV accretion of 0.7% to S$2.068 from S$2.054 as at Dec’20
- Reduce gearing to 43.8% from 44.3% as at Dec’20
- Increase Office WALE to 5.55 years from 4.66 year and Retail WALE to 3.18 years from 2.56 years
Key details of acquisition:
- The price is based on an agreed property value of GBP353m (S$667.2m), which is 4.6% discount to valuation of GBP370m (S$699.3m)
- Total acquisition cost is GBP360.1m (S$680.5m)
- NPI yield of 4.5% based on passing income as at 31 Mar 2021
- Committed occupancy at 96.7% as at 31 Mar2021
- Long WALE of 12.3 years (9.1 years WALE to break) with minimal or no expiring leases until 2027.
- GBP2.2m (S$4.2m) of 2-year income guarantee for vacant spaces and GBP4.5m (S$8.5m) of 2-year income guarantee for retail leases including 1-year for co-working lease
- Total NLA is 293k sqft comprising office of 257k sqft (88%) and retail of 36k sqft (12%)
- 999-year leasehold from 24 Oct 1990 with 968 years remaining
- The acquisition will be funded by proceeds from divestment of S$280m, GBP175m (S$330.8m) of loan with interest rates of 2.7% and S$70m of perpetual securities with a coupon of 4.25%.
- The two largest tenant trade mix comprises Banking, Insurance and Financial services and TMT at 36% and 32% respectively. Key tenants include Charles Taylor, Lyst, Spaces Trustpilot and ADM Investor Services
- The property is an 11-storey Grade A office building with ancillary retail on the ground and mezzanine floors. It is located at the heart of the City of London CBD at the intersection of Mincing Lane, Great Tower Street and Mark Lane. The building is within walking distance to Monument, Tower Hill and Liverpool train stations and is the largest of three buildings within the Minster Court Estate.
Key details of the divestment:
- Divestment portfolio comprises of 3 office strata units located in Suntec Tower One and 7 office strata units located in Suntec Tower Two.
- Total Strata Area of 78,491sqft (NLA of 77,813 sqft), 1.9% of the share value in the entire Suntec City development
- Total divestment value of S$197m (S$2,510psf), 8.9% above valuation of S$180.9m (S$2,305psf)
- Total net proceeds from divestment would be S$194.8m
- NPI yield of 3.1% based on passing income as at 1 Apr 2021
- Expected completion in 3Q2021
The Minster Building, facade