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SINGAPORE (July 2): CGS-CIMB Research is maintaining Suntec REIT as one of its top picks in the SREIT space.

CGS-CIMB says the acquisition of an office property in Pyrmont, Sydney, should remove the share price overhang due to the unused proceeds from the recent placement.

Suntec REIT acquires Grade A office building in Sydney for A$297 mil

FY19F DPU yield of 5.1% is also on the higher end of its comparable peers’ yield range and Suntec REIT should also benefit from the continuing office rental upcycle in Singapore.

The property is located 2km west of Sydney CBD and next to the John Street Light Rail Station.

Scheduled to be completed in 1Q2020, the building has 203,400 sf of lettable area and is 91.2% pre-committed with Publicis Groupe as anchor tenant.

It has a long weighted average lease expiry of 10.2 year. There is also a three-year rental guarantee for unlet office spaces.

CGS-CIMB says the property has an initial yield of 5.5% based on the completed property value of A$297 million ($285 million), with annual rental escalation of 3-4%.

The purchase will expand its AUM to $10.2 billion with Australia accounting for a larger 14% of its assets.

Suntec REIT says the acquisition could boost its operational DPU by 0.49% on a pro-forma basis.

The trustee-manager will pay an initial deposit of A$14.85 million with the balance to be paid upon practical completion of the property.

It intends to fund the acquisition with a combination of A$ debt as well as from part of the proceeds from the earlier private placement.

On completion of acquisition, gearing is likely to remain relatively unchanged at 38-39%.

“We adjust our FY19F and FY20F DPU by –3.9% and –0.5%, respectively, to factor in the latest acquisition as well as the dilution from the recent placement exercise,” says analyst Lock Mun Yee.

“Additionally, we tweak our DDM valuation cost of equity assumption from 7.3% to 6.9% to reflect the current benign interest rate outlook. As such, our DDM-based target price is raised to $2.15 from $2.06 previously,” she adds.

As at 4.11pm, units in Suntec REIT are trading at $1.95, translating into a 5.1% dividend yield for FY20F.