5 things you need to know about Suntec REIT's North-Sydney acquisition

Purchase price, recurring rental income will be fully hedged.

According to CIMB, after attending Suntec REIT’s (SUN) briefing and gaining more information, it turned positive on the North-Sydney acquisition and maintain its Outperform rating.

Here's more from CIMB:

What Happened

During the briefing, management highlighted several key points on the deal, including:

1) the 3.5% yearly step-up in rental rates that has been built into Leighton’s lease (WALE of 10 years for 76% of the building’s total NLA),

2) Leighton’s intention to sub-let the remaining 24% NLA, with SUN collecting the market rent attained, or pay a guaranteed NPI of c.A$724/sq m/year with 3.5% annual escalation in rental rate (whichever is higher) for four years after completion,

3) payment for the construction of the property will be progressive over a 2-year period,

4) the below 3% all-in interest rate for the S$500m loan,

5) both the purchase price (during the construction phase) and the recurring rental income (upon completion) will be fully hedged against currency fluctuations.

What We Think
The attractive yield, financing package and management direction indicates that management has thoroughly considered the acquisition’s risks and rewards.

Furthermore, we believe that the progressive payment for the acquisition will keep SUN’s gearing at a comfortable level of below 40%. The divestment of Park Mall, if the right offer comes along, is an option for SUN to lower gearing.

Although, the high average translated NPI of A$724/sq m/year (vs. downtown Sydney’s c.A$520/sq m/year) remains a concern, our calculations revealed that even if the rental rate drops to the current market rate after the first four years, the building’s yield remains at an attractive level of 6.4% (from the initial yield of 6.9%).