ARA Asset Management

DBS Group Research, Equity, Aug 26

THE Business Times reported on Tuesday that the Straits Trading Building, currently owned by Straits Trading Company (STC), may be sold to an overseas party in Asia for about S$450 million, implying S$2,800 per square foot of NLA (net lettable area).

This is understood to be a benchmark pricing for an office block in recent years. The price is understood to imply an exit yield of 3 per cent. The property, which was completed in 2009 and has a NLA of 159,000 sq ft, is currently 100 per cent occupied and anchored by Rajah & Tann, one of Singapore leading law firms and the headquarters of STC.

Will Suntec Reit buy? Earlier in May, we had mooted the possibility that STC could sell the asset to Suntec Reit, given STC's tie-up with ARA, which is also the manager of Suntec Reit.

We see synergies to Suntec Reit's portfolio, given its strategic location within Singapore central business district, which is its core investment strategy.

However, the property's reported selling price of S$450 million is significantly higher than its S$400 million valuation as at Dec 31, 2013. A 3 per cent cap will mean that the deal is likely to be only marginally accretive to Suntec Reit, assuming 100 per cent debt funding which will lift gearing up to about 40 per cent (after computing for future capex for its Australia investments); we believe this is not sustainable in the long term.

ARA AM aims to extract maximum value for its investors.

Although the Straits Trading Building is widely anticipated to be acquired by Suntec Reit, a sale to a third party while having a negative impact on the value of ARA's total AUM, would not be a worse case scenario.

This further reaffirms the group's focus on extracting maximum value from assets under its management, versus simply retaining them for the purpose of generating management fees.

For Suntec Reit, given the high capital value of its office assets in Singapore, we believe that near-term acquisitions will remain limited. However, future earnings will continue to be driven by the completion of asset enhancement works at Suntec City Mall in the near term, as well as the completion of the 177-190 Pacific Highway office development in Sydney in 2016; the Reit had acquired this for S$413 million in November 2013.

We maintain our recommendations for

ARA: BUY (TP: S$2.00)