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Morningstar | Suntec REIT acquires 21 Harris Street in Pyrmont, Sydney; FVE raised to SGD 1.82

Suntec REIT announced it will acquire a 100% stake in a Grade A freehold commercial property at 21 Harris Street, Pyrmont, Sydney, Australia with a net lettable area of 203,400 square feet (comprising about 181,900 square feet of office space and 21,500 square feet of retail space) for AUD 297 million, or about SGD 285.1 million. This translates into a purchase price of AUD 1,460 per square feet (or SGD 1,402 per square feet). The property is only 2 kilometers west of Sydney's Central Business District, or CBD, and is in a technology, media and entertainment hub. It is planned to be completed in the first quarter of 2020. Suntec REIT intends to fund this acquisition through Australian dollar-denominated debt and equity on a 40:60 split. Part of the equity funding comes from a private placement of 111 million new Suntec REIT units (representing about 4.3% of the total number of units in issue before the private placement) completed in May 2019, which raised about SGD 200 million. We adjusted our forecasts accordingly by factoring in this acquisition, the private placement, and updated the fair value of properties and joint ventures held, according to the trust’s latest annual report. We increased our fair value estimate to SGD 1.82 per unit (from SGD 1.74). Our no-moat and stable moat trend ratings remain intact.

The property is currently 91.2% precommitted with Publicis Groupe, a global communications and marketing company, as its anchor tenant. The remaining precommitted spaces will be leased to Campfire, an international co-working operator, a childcare centre and a gym operator. The property will have an initial net property income, or NPI yield of 5.5% (which is slightly lower than the 6% NPI yield generated by the trust’s other Sydney property, 177 Pacific Highway) with an annual rental escalation of between 3%-4%. The developer has also provided a three-year rental guarantee on unlet office space post completion.

We view this transaction positively as: 1) it is distribution per unit, or DPU accretive to unitholders; 2) it expands the trust’s property portfolio in Australia; and 3) the trust will benefit from the long-weighted average lease expiry of 10 years and two months for this property. The property is also strategically located, given its close proximity to the Sydney CBD. This acquisition is in line with the trust’s strategy because management has previously said it is are on the lookout for acquisition opportunities to drive long-term growth for its unitholders.