Suntec – UOBKH

Limited Upside From Dilution Impact

Suntec REIT has 56% exposure by net lettable area (NLA) to the office segment, and the rest in retail. Its portfolio includes three properties: Suntec City, Park Mall and Chijmes.

Key driver from office segment. Suntec REIT will ride on the upside of rental reversions for both the office and retail segments. Majority of Suntec REIT’s office leases are expected to expire in FY08 and FY09 (32.6% and 40.4% of NLA respectively). While decent retail rental renewals are expected, retail rental reversions generally increase at a lower rate than office rentals. In addition, asset enhancements of Suntec City Mall are near completion except for the Fashion Zone at Galleria scheduled to complete by this month. This leaves little room for Suntec REIT to do yield enhancements if it does not acquire additional assets, except for Park Mall which pales in impact to Suntec City where comparison with yield is concerned.

Dilution impact from deferred units. Suntec REIT will encounter dilution impact from their 207m deferred new units issued at IPO, which will start in Jun 08 through six equal semi-annual payments of S$34.5m each, and the deferred units are not subjected to any lock-up period.

Formula 1 to affect retail sales. With the Formula 1 race to be staged in Singapore in 2008-12, we expect retail sales in Suntec City to suffer as safety requirements to barricade the street circuit will obstruct access to the mall.

Initiate with HOLD, fair value: S$2.31. We initiate coverage of Suntec REIT with HOLD and a fair value of S$2.31, implying an upside of 10.4% and a total return of 14.33%. In deriving our fair value, we have factored in the full dilution impact from the deferred units. We suggest entry at S$2.00.