Suntec REIT poised for multi-year growth

Overseas foray to boost earnings.

According to OCBC Investment Research, Suntec REIT has essentially locked in robust growth over the next few years with its strong asset management and execution.

Here's more:

First started its Phase 1 rejuvenation works at Suntec City in Jun 2012, Suntec REIT has recently reopened Suntec Singapore and the retail space in 2Q13 with a strong committed occupancy of 99.6%.

In addition, passing rent of S$13.09 for Phase 1 space was significantly above the rent of S$10.34 achieved at the rest of the mall, proving the success of the asset enhancement initiative (AEI).

We understand that Phase 2 AEI is on track for completion in 4Q13, and that leasing interest has been equally optimistic (pre-commitment of 83.7% in 3Q13). While we may potentially see some weakness as Suntec REIT prepares for Phase 3 AEI in the immediate term, we believe it has laid the foundation for sustainable growth in the years ahead.

Overseas foray likely to be earnings accretive

In mid-Nov, Suntec REIT also made its first overseas investment with the acquisition of 177-199 Pacific Highway, a Grade A freehold office tower under development in Australia.

We see several strong merits in the transaction. First, the deal is expected to be earnings-accretive, as Suntec REIT will receive coupon payments at a yield of 6.32% p.a. during the construction, and a NPI yield of 6.89% upon completion of the property.

Second, the property is 100% pre-committed, and Suntec REIT will enjoy an annual rental escalation of c. 3.5% for its head lease and rental guarantee for four years for any vacant space upon completion. Thirdly, all-in borrowing cost (including interest rate hedge) is expected to be below 3%, hence giving Suntec REIT a positive yield spread.