(18-11-2013, 09:06 AM)sunrocker Wrote: [ -> ]I don't get it, getting a coupon of 6.32% p.a while the building is under construction. It's the first time I encounter such thing. Is it common in Australia or just this project? The coupon is to entice buyers?
Can anyone explain this to me?
It sounds like Suntec is lending the money to the developer/ builder at an interest rate of 6.32%.......
I could be wrong on this, the way I look at this deal is
1) Leighton is selling the building “off the plan” to Suntec at AUD413 million.
2) In normal practise in Australia, as a property developer, Leighton should seek its own source of funding for the project. If Leighton were to borrow in Australia, the borrowing cost would be around 4.5% to 7%, depending on its credit standing, I would say.(RBA cash rate is at 2.5%).
3) As at 31-sep-2013, Suntec’s all in cost of borrowing in SGD is at 2.67%.
4) Suntec has secured a SGD loan of 500 million to fund the acquisition in AUD. Assuming all in borrowing cost in SGD plus hedging cost = 3.5%. Funds would be drawn down to pay for land and progress payment on construction. Leighton would pay Suntec 6.32% on accumulated amount of “payments” received.
5) The loan is borrowed by the trustee of Suntec Reit in Singapore which could then be injected in part as capital and in part as shareholders loan into its Australian subsidiary trust. Note that shareholders loan is subject to “thin capitalization” limit.
6) Under the Managed investment Trust scheme (MIT) which the deal has been structured, Suntec would be subjected to withholding tax of 15% on profits repatriated back to Singapore.
7) If one could borrow 100% at 3.5% and get a return of over 6.0% (subject to 15% tax on profit), why not? It seems like a good deal to me.
(Not Vested)
From Maybank Kim Eng
Geographic Expansion Outside Singapore
Maiden Down Under acquisition. Suntec has entered into agreements to acquire 177-199 Pacific Highway, a freehold land and property to be developed for a consideration of AUD413.19 (~SGD490m). This is a 31-storey A grade state-of-the-art commercial tower which is targeted for completion in early 2016 with NLA of 423,915 sq ft. It is located in one of the most prominent sites in North Sydney Central Business District at the junction of Pacific Highway and Berry Street and enjoys direct access to a number of major surrounding roadways and is well served by public transport (5-minute walk from North Sydney station.)
100% pre-leased. The project is 100% pre-committed with the Leighton Group, one of Australia’s largest building, contracting and property development group taking a head lease of 76% of the NLA and WALE (weighted avg lease expiry) of approximately 10 years. The building will be home to Leighton Holdings’ corporate HQ. Leighton Holdings will
also provide a rental guarantee for four years for any vacant space on
completion.
Yields are attractive ... Upon completion, the initial NPI yield is 6.89% and there will be coupon payments of 6.32% per annum payable to Suntec during the construction (on the progressive payments made to the vendor). The acquisition will be fully debt-funded by a SGD500m 5-year unsecured loan facility provided by Commonwealth Bank of Australia, DBS and Standard Chartered. Vis-à-vis Suntec’s existing FY12 portfolio yield of ~3.6%, the Australian acquisition does appear favourable with near term borrowing costs unlikely to surpass the ~6% range, thus generating positive carry on this transaction (excl. forex considerations).
… but strategic focus and forex risk in question. Nonetheless, we remain leery of future forex risk on both income streams (revenue in AUD but distribution paid in SGD) and balance sheet (asset purchased in AUD but loan facility in SGD). The AUD is closely tied to the commodity cycle and demand from China. Suntec has not mentioned that these have been hedged. In addition, the viability of its geographic expansion strategy remains to be seen with one acquisition in Australia (~5.6% of GAV). The aggregate leverage will also escalate to 42.3% from current 38.6%, making it the second highest-geared S-REIT after Kep REIT. We believe that the market would react negatively to this given the abovementioned overhangs and also acquisition in a rising interest rate environment, which tends to correlate with higher cap rates and lower property values. Maintain BUY with a reduced TP of SGD1.83. Suntec is now trading at forward-DPU yield of 5.9% and P/B of 0.76x.
(18-11-2013, 11:23 AM)Boon Wrote: [ -> ]I could be wrong on this, the way I look at this deal is
1) Leighton is selling the building “off the plan” to Suntec at AUD413 million.
2) In normal practise in Australia, as a property developer, Leighton should seek its own source of funding for the project. If Leighton were to borrow in Australia, the borrowing cost would be around 4.5% to 7%, depending on its credit standing, I would say.(RBA cash rate is at 2.5%).
3) As at 31-sep-2013, Suntec’s all in cost of borrowing in SGD is at 2.67%.
4) Suntec has secured a SGD loan of 500 million to fund the acquisition in AUD. Assuming all in borrowing cost in SGD plus hedging cost = 3.5%. Funds would be drawn down to pay for land and progress payment on construction. Leighton would pay Suntec 6.32% on accumulated amount of “payments” received.
5) The loan is borrowed by the trustee of Suntec Reit in Singapore which could then be injected in part as capital and in part as shareholders loan into its Australian subsidiary trust. Note that shareholders loan is subject to “thin capitalization” limit.
6) Under the Managed investment scheme (MIS) which the deal has been structured, Suntec would be subjected to withholding tax of 15% on profits repatriated back to Singapore.
7) If one could borrow 100% at 3.5% and get a return of over 6.0% (subject to 15% tax on profit), why not? It seems like a good deal to me.
(Not Vested)
Likely a win-win situation for both Suntec and Leighton. Suntec for all the points mentioned by Boon.
Possible concerns would be FX impact which may erode the returns.
Leighton needs this deal as badly if not more than Suntec. Their share price is depressed (due to graft allegations). A lot of it points to issues recovering cash from international operations. Financing-wise, their borrowing costs are high (at one pt issued notes near junk status).
http://www.macrobusiness.com.au/2013/10/...n-destroy/
http://enews.threeware.com.au/articles/get/2217/580057
There is no need for Leighton to provide all those guarantees for rentability (remaining 24% and for 4 years?! what are they smoking at Leighton?) but it may show how desperate they are now (tiding the storm?) I hope Suntec would have done their due d that Leighton can deliver those promises when things turn sour.
It takes two to clap but I wonder who's clapping harder.
ARA don't have any yield accretive assets
to sell to Suntec meh?
Suntec used up debt capacity then next time
raise equity to fund acq from ARA?
1) it would make no sense at all if Suntec do not hedge against FX risk during the initial 5 year tenure of the SGD 500 million loan facility:
a) It is too risky to play “uncovered interest arbitrage” and expose oneself to FX risk against a volatile commodity currency such as the AUD.
b) Lenders are likely to impose loan covenant for borrower to mitigate FX risks – by hedging
c) “Uncovered interest arbitrage” if went wrong could potentially jeopardise Suntec’s credit rating and hence its 60% gearing limit.
2) Leighton is the developer cum contractor – it would reap profits at both ends – development profit and construction profit – the profit margin would probably be enough to cover the remaining 24% rental for the 4 years. Bear in mind that Leighton has more than 24 months to secure potential tenants for the remaining 24% of space.
3) “graft allegations” were job bidding related and not on project delivery. I think Leighton’s project delivery record is still intact – they have just been awarded the Thomson line project by LTA.
http://infopub.sgx.com/FileOpen/1278181....eID=264796
(not vested)
I don't think this financing structure is unique. Keppel REIT structures its acquisition deals in Australia in a similar manner.
(18-11-2013, 06:28 PM)desmondxyz Wrote: [ -> ]No significant impact on gearing?
http://infopub.sgx.com/FileOpen/Presenta...eID=264833
I don't understand about this too. Furthermore, while they are progressively paying for the construction, they are collecting the 6.32% yearly. The rental yield upon completion is 6.9%, guaranteed for 4yrs. This means that Suntec's revenue from this development is guaranteed till 2020? Seems good to me.
(18-11-2013, 11:29 PM)NTL Wrote: [ -> ] (18-11-2013, 06:28 PM)desmondxyz Wrote: [ -> ]No significant impact on gearing?
http://infopub.sgx.com/FileOpen/Presenta...eID=264833
I don't understand about this too. Furthermore, while they are progressively paying for the construction, they are collecting the 6.32% yearly. The rental yield upon completion is 6.9%, guaranteed for 4yrs. This means that Suntec's revenue from this development is guaranteed till 2020? Seems good to me.
They keep emphasizing that the acquisition is funded by the secured 500 mil loan which means current gearing already taken this into account, so there is no further debt raising for this acquisition, hence no impact on gearing?
Seems like the guaranteed revenue till 2020 is true, that's part of the deal. Suntec will start to collect 'rental' while the building still under construction. And 100% rental is guaranteed upon completion by 2016 until 2020.
