Suntec – Kim Eng

Equity Fund Raising Overhang Removed

MBFC Twr 3 acquisition. DBS announced on 10 Dec that it has entered into an agreement with Choicewide Group Limited, a JV of Cheung Kong (Holdings) Ltd and Hutchison Whampoa Limited, to purchase 30% equity stake (and its associated loan) in Marina Bay Financial Centre (MBFC) Twr 3 for an aggregate consideration of SGD1.035b (SGD2,555 psf). DBS is the anchor tenant at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors. Both parties also entered into a conditional put option agreement for DBS to take up Choicewide’s remaining 3.33% equity stake and its associated loan for an estimated aggregate price of SGD115m. The remaining stake on MBFC Twr 3 (66.66%) is held by Hong Kong Land and Keppel Land.

A little bit of history. DBS sold its Shenton Way office buildings (Twrs 1 & 2, about 875k sq ft net lettable area at Shenton Way) to funds managed by Goldman Sachs fo SGD690m (SGD800 psf) end-2005, with a leaseback agreement for an initial period of 8 years. The logic back then was that the sale to enhance the efficiency of its balance sheet. Goldman Sachs later sold the buildings to Overseas Union Enterprise for

SGD871m (SGD970 psf) in 2010, whose upgrade plans prompted DBS’ shift to Marina Bay Financial Centre (MBFC). In Oct 2012, DBS moved into its new headquarters at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors of the 46-storey building. Some of the support functions were relocated to Changi Business Park. Recall also that Suntec REIT purchased MBFC Phase 1 (33.33% stake) from the same vendor on 9 Dec 2010 for SGD1.495.8b, including rental support of SGD113.9m over a 60-month period. This works out to SGD2,568 psf with income support and SGD2400 psf excluding income support. The latest FY11 valuation for MBFC Twr 3 (as of 31 Dec 2011) was SGD1.523b (SGD2,615 psf).

Positive for Suntec. We view this acquisition positively for Suntec REIT as it removes the EFR overhang of MBFC Twr 3 being injected into the REIT. It can henceforth focus more on its organic AEI on Suntec City. In addition, Suntec REIT has, over the weekend, also appointed the CEO of APM Property Management Pte Ltd as its Deputy CEO with effect from 1 Jan 2013. We think this shows Suntec REIT’s commitment to making the

Suntec City revamp a success. We reiterate a BUY rating for Suntec REIT. Our TP of SGD1.70 is unchanged for now, but we believe there is upside potential after FY12 results as pre-commitments for phase 1 Suntec City Mall (complete by 2Q12) are likely to be secured above Suntec’s post-AEI target of SGD12.59 psf/mth.