With properties in Singapore and Australia currently, Suntec REIT (SGX:T82U) proposed to acquire a 50.0% interest in Nova North, Nova South, and The Nova Building in the United Kingdom. Funding-wise, it will be through loans, as well as through perpetual securities.

A virtual extraordinary general meeting (or EGM) was held this morning to seek unitholders’ approval for the proposed acquisition, which I’ve attended as a unitholder.

In this post, you’ll find a summary of the presentation by the CEO Mr Chong Kee Hiong, his response to some of the questions raised by unitholders (when they signed up to attend the EGM), the results of the EGM, as well as my personal thoughts about the proposed acquisition:

Presentation by CEO Mr Chong Kee Siong

Overview of the Acquisition:

  • Mr Chong shared that the properties are fairly new (they are completed only in 2017), and that they are acquired at a 1.2% discount to the independent valuation of £436.0m (S$776.1m.)
  • Location-wise, they are strategically located opposite Victoria Station (which is the second busiest railway station in the UK), and there is a direct train link to Gatwick Airport.
  • He also added that the REIT managed to negotiate for a 2-year rental guarantee in retail income in view of the Covid situation, which provides coverage in terms of rental income contributions from the the retail component.
  • In terms of committed occupancy, Mr Chong said that both the office and retail components are currently 100.0% occupied, with the average weighted average lease expiry at 11.1 years (with no leases expiring between 2020 and 2026.)

Rationale for the REIT’s Expansion into the United Kingdom:

  • Mr Chong explained that the UK economy is the second largest in Europe, with office jobs in London projected to increase by an average of 1.1% per annum in the next 5 years. Coupled by a limited new supply of office properties, he is of the opinion that prime rents are expected to improve in the medium term, with vacancy rates remaining stable.
  • He also shared that, over the years, the overall vacancy rates in West End (where the properties are located) are at its lowest compared to other parts of London (in the City, as well as in East London.) At the same time, prime rents of office properties in the West End are also the highest compared to rents of those located in the City, as well as in East London.

Future of Offices:

  • Despite the emergence of working from home scheme, Mr Chong is of the opinion that physical offices still has a central to play, in that they help facilitate face-to-face interactions which technology cannot replicate.
  • He also clarified that the departure of some of the office tenants is not due to their employees working from home (and as such, they are looking to downscale their office spaces.) Rather, it is due to the companies not doing well and had to close down as a result.

Benefits of the Acquisition:

  • Mr Chong shared that the proposed acquisition is a yield-accretive one (by 2.3% from 8.570 cents/unit pre-acquisition to 8.768 cents/unit post-acquisition.)
  • Post-acquisition, the REIT’s office portfolio WALE will be increased to 4.4 years (from 4.0 years), while its retail portfolio WALE goes up to 2.8 years (from 2.3 years.)
  • The acquisition also reduces tenant concentration risk, where the total income contribution by the REIT’s top 10 tenants will come down to 18.4% (from 20.2%.) Also, no one single tenant will contribute more than 3.1% (it was at 3.4% before the acquisition) towards the REIT’s overall income post-acquisition.

Funding for the Acquisition:

  • Mr Chong explained that the acquisition will be funded through £200.0m in loans in GDP to achieve partial natural hedge, S$200.0mil in perpetual securities, and up to S$217.9m of loans in SGD.
  • While the REIT’s gearing will be increased to 43.5% post-acquisition (from 41.3%), but Mr Chong said that there remains about S$1.5b of debt headroom (which in his opinion is a sufficient to provide for contingencies) before the gearing reaches the regulatory limit of 50.0%.

Target Date of Completion:

  • Finally, Mr Chong updated that the target date of completion of the proposed acquisitions will be on 18 December 2020.

Questions Raised by Unitholders

  • With regard to a question raised on whether or not the REIT has the expertise or talent to manage the newly acquired properties in a new geographical location, Mr Chong said that the Manager has appointed ARA Dunedin, which has a strong local asset management expertise ands deep knowledge of the UK real estate market, as the owner’s local representative as well as to provide ongoing local asset management services. Additionally, for continuity and also familiarity, Mr Chong said that Landsec, the developer of the property, will continue to provide property management services to the property.
  • Another unitholder asked about whether or not the REIT have set any caps on its gearing level internally, Mr Chong responded that the target gearing ratio is between 40.0% and 45.0%, with the appropriate interest coverage multiples. As such, the gearing ratio post-acquisition is still within the REIT’s target.

Results of the EGM

The ordinary resolution to approve the proposed acquisition of 50.0% interest in two Grade A office buildings with ancillary retail in Victoria, West End, London, United Kingdom was passed with 99.97% of the votes for, and 0.03% of the votes against.

In Conclusion

As someone who is a firm believer in diversification, I am in favour of the proposed acquisition. The asset valuation (in percentage-terms) post-acquisition (with the percentage before the acquisition in brackets) are as follows:

Singapore: 77.2% (from 82.8%)
Australia: 16.1% (from 17.2%)
United Kingdom: 6.7% (new geographical location)

Also, I like the acquisition for the fact that it is a yield-accretive one.

The only thing I am not too comfortable is the REIT’s gearing ration, which, at 43.5% post-acquisition, remains one of the highest among all the Singapore-listed REITs. No doubt the CEO explained that there remains about S$1.5b of debt headroom, but its ability to make further acquisitions in my opinion, will be limited.

With that, I have come to the end of my summary of the retail and office REIT’s EGM (my final AGM and EGM for the calendar year 2020.) Hope you find it useful and here’s wishing you a wonderful weekend ahead!

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Disclaimer: At the time of writing, I am a unitholder of Suntec REIT.

 

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