What will I do about Suntec Reit?

A year ago, I initiated position in Suntec Reit (SGX: T82U) because I believe it was an undervalued Reit with immense growth potential and headroom for DPU to increase. I suffered capital losses since as I entered at $1.88 near the highs.

Its share price even plunged to the lows of $1.12 during the stock market crash in Mar 2020 but I was unfazed. I did not cut losses nor add on to the investment by averaging down because this was intended to be a small long-term position and I had other better buying targets then in Mar 2020.

On 8 Oct 2020, Suntec Reit announced the proposed acquisition of 50% stake of London Nova Development from Canada's pension fund for £430.6m. The development consists of two Grade A office buildings in the heart of Victoria, West End, London with a leasehold tenure of 1,042 years. The net property income yield is 4.6% and this acquisition is 4.9% DPU accretive. There is 100% committed occupancy with long WALE of 11.1 years. 

This acquisition will be funded fully by debt, propelling the gearing ratio of the Reit to 45.2% which is close to the revised leverage limit of 50% as stipulated by MAS. As as result, the selling of fearful retail investors and some funds caused the share price of Suntec Reit to dip more than 3% on 9 Oct 2020.

It is almost certainly that an equity fund raising is on the cards in the near future to possibly pay off short term liabilities, for working capital or for the next acquisition. The dividends collected from Suntec Reit by unitholders in the recent years will not be enough to cover the additional capital outlay. Hence short term traders and funds holding Suntec Reit with no long term commitment are selling it.

I believe that this acquisition is beneficial to unitholders for the long-term in terms of DPU, geographical diversification, strengthening and growth of Suntec Reit's property portfolio at the trade-off of incurring additional debt at a weighted cost of debt of 2.58%. Locally in Singapore, there is limited room to acquire long leasehold high quality commercial properties for around 5% yield. Hence it is justifiable that the manager seek opportunities abroad in Europe for expansion of its portfolio. Suntec Reit has faced challenging times to sustain its DPU due to the health pandemic impacting retail operations in Suntec City and its newly developed properties such as 9 Penang Road, 477 Collins Street in Melbourne and 21 Harris Street in Sydney have not fully contributed to their property income.

As a long term investor, I treat this transaction as merely another purchase of an overseas property for geographical diversification as well as to increase assets for additional future recurring income. It is a first foray into UK commercial property market even though Suntec Reit is focused on deepening its presence in Australia while also seeking opportunities in other key gateway cities such as Seoul, Tokyo, London, Paris, Frankfurt and Berlin.  

I am prepared to subscribe to rights or preferential offering if there is any equity fund raising in the short-term to avoid dilution. However, I do not plan to average down on my holdings in Suntec Reit unless if its share price plunged to below $1.30 then I may consider given the larger margin of safety.

Thank you for reading.

With love & peace,
Qiongster