Suntec REIT - RHB Invest 2024-04-01: Can Internalisation Unlock Value?

• We see strong merits in internalising Suntec REIT’s manager due to its unique positioning of differing asset class focus and strengths compared to its Sponsor, high free float and low sponsor stake, and its large size with high quality assets.
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Why Suntec REIT fits the bill for internalisation?

• Suntec REIT (SGX:T82U), with a sizeable portfolio AUM of S$12bn, has historically had a limited reliance on its Sponsor for acquisition and fundraising. In addition, Suntec REIT is different from other sponsor-led S-REITs as:
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  2. High free float and limited shareholder concentration with the Sponsor holding a mere 10% stake, and
  3. no visible sponsorgrowth pipeline.

Proposed internalisation structure.

• In order for a successful internalisation, majority unitholder approval (>75%) and amendments to the trust deed are needed. We therefore believe it is important to align all stakeholders including the Sponsor and minorities. This, in our view, can be done by buying the REIT manager at a fair market value and also fully retaining the existing management team.
• Based on our initial analysis of past REIT manager transactions, the fair value range has been 7-9x of the historical management fees.
• Considering Suntec REIT’s matured growth profile and size as well as limited embedded growth from the internalisation process, we believe a fair value estimate should be at a slight discount, or in the 5-7x range of FY23 management fees (base and performance fees) or ~S$307- 430m. This could be satisfied fully through shares or a combination of majority shares and cash, taking into account its high gearing while providing upside incentive for the Sponsor from share price appreciation.

Potential mid-single digit DPU accretion.

• Read more at SGinvestors.io.

Vijay Natarajan RHB Securities Research | https://www.rhbgroup.com/ 2024-04-01 SGinvestors.io

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