Suntec REIT (SGX: T82U) invests in income-producing real estate that’s primarily used for office and/or retail purposes. Its portfolio consists of Suntec City, Suntec City Convention Centre (60.8% interest), a one-third interest in One Raffles Quay and several commercial buildings in Australia, to name a few. Suntec REIT is managed by ARA Trust Management (Suntec) Limited, which is part of the ARA Asset Management group.
On Monday, the REIT announced the acquisition of a prime freehold Grade A office building located at 21 Harris Street in Pyrmont, Sydney. This is Suntec’s second acquisition in Sydney, and it demonstrates management’s commitment to diversifying Suntec’s portfolio out of Singapore.
Here are eight interesting facts about Suntec’s latest acquisition that investors should take note of.
1. The amount payable for the property is 297 million Australian dollars (around S$285.1 million) and will be funded by a combination of equity and Australian dollar bank borrowings. A security deposit of AU$14.85 million has been paid upon acquisition, and the remainder (A$282.15 million) will be paid after practical completion and settlement in Q1 2020. Investors should note that Suntec REIT raised approximately S$195.9 million in net proceeds via a private placement of 111,111,000 shares in April 2019.
2. 21 Harris Street is currently under development and is slated to be a nine-storey office building comprising 181,900 square feet of office space and 21,500 square feet of retail space. The developer is Milligan Group, a residential and commercial space developer.
3. The property has achieved pre-committed occupancy of 91.2%, and its anchor tenant will be Publicis Group (a global communications and marketing company). Other tenants include Campfire (an international co-working operator), a childcare centre, and a gym operator. There are also three years of rent guarantee on the unlet office space post practical completion.
4. The initial net property income (NPI) yield is 5.5%, and there will be built-in rental escalation clauses of 3% to 4% so that unitholders enjoy steadily increasing rental income. The NPI yield also compares favourably against other prime office buildings in the CBD area that have NPI yields of around 4.5%.
5. The property has a long weighted average lease (WALE) expiry of 10.2 years, which compares favourably with the overall portfolio WALE of 2.40 years as of 31 March 2019. It is also much better than the Australian portfolio’s WALE of 5.37 years. The long WALE enhances income stability and provides more predictable rental income flow to unitholders.
6. The distribution per unit accretion (pro-forma) is about 0.49%, but this is subject to the Australian dollar exchange rate as well. Suntec REIT’s AUM will expand to S$10.2 billion from S$9.9 billion as of 31 March 2019 with this acquisition. Australia will now take up 14% of total AUM, up from 11% pre-acquisition.
7. The acquisition rides on Sydney’s tight office market with strong demand and a lack of supply, which should result in upward pressure on rental rates. The property is also within a 10-minute drive of Sydney’s CBD and will be the location of choice for technology and media companies, of which Pyrmont is a hub for.
8. Chong Kee Hiong, CEO of the REIT manager, had this to say about the acquisition:
“We are pleased to deepen our presence in Australia, with the acquisition of 21 Harris Street. The property is a strategic fit with Suntec REIT’s portfolio of high-quality assets and further enhances the stability of the REIT’s income. Following the completion of this acquisition, approximately 14% of Suntec REIT’s assets under management will be in Australia.
The accretive acquisition will improve earnings and distributions to unitholders with an initial net property income yield of 5.5% upon practical completion. Unitholders will enjoy income stability with growth through the long lease terms and annual rental escalations.”
Suntec REIT has landed itself a strategic asset in Sydney that provides strong NPI yield along with rental escalations and high rental pre-commitment. Once completed, the property will further diversify the REIT’s exposure away from Singapore and also add to DPU growth for unitholders. Unitholders should feel cheered by this acquisition as it demonstrates the manager’s savvy in identifying quality assets that enhance Suntec REIT’s operational and financial metrics.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Suntec REIT.