Suntec – OCBC

Initial yield on MBFC tight but consider strategic merits

EGM convened for MBFC acquisition. As announced previously, Suntec REIT will acquire a one-third stake in Marina Bay Financial Centre (MBFC) Phase 1 from Cheung Kong Holdings Ltd and Hutchinson Whampoa Ltd. MBFC Phase 1 constitutes Towers 1 and 2, and also Marina Bay Link Mall. The stake will be acquired based on an agreed property value of S$1,495.8m, which includes rental support of S$113.9m over a 60-month period from the completion date of the acquisition. The S$2400 per square foot price (ex-rental support) is equivalent to what K-REIT [NOT RATED] is paying for its one-third stake. The transaction is subject to unitholder approval, with an EGM being called for Friday, 26 Nov at 10 AM.

Financing details released. Suntec REIT recently released more financing details for the proposed acquisition. In the unitholders’ circular, Suntec said it plans to fund the total acquisition cost through S$1105.0 in debt (72%) and S$428.2m in equity (28%). Suntec has arranged debt financing via a 3.5 year term loan (S$773.5m) and a 4.5 year term loan (S$331.5m). It disclosed that this facility was secured at a very competitive all-in cost of debt of 3.12%. As for the equity portion, Suntec plans to raise the S$428.2m through a private placement (with timing and issue price dependent on market conditions).

Initial yield tight but consider strategic merits. In the unitholders’ circular, Suntec estimates MBFC’s FY11 net property income at S$60.6m. We understand that tenants are only moving in progressively through the year (occupancy assumptions were not disclosed), and this NPI figure is heavily supported by S$37.2m in rental support, or 32.7% of the total rental support amount. This translates to a fairly tight initial yield of 4% on the acquisition. Nevertheless, we believe this is a sound acquisition for Suntec from a long-term, strategic perspective – both from the perspective of a Grade A office landlord and specifically with Suntec’s core focus on the Marina Bay area.

Maintain BUY. We have revised our earnings estimates to incorporate the proposed acquisition, which we assume is completed on 01 Jan 2011. We have revised our issue price assumption down from S$1.50 per unit to S$1.30 per unit, but our fair value estimate slips only marginally from S$1.64 to S$1.63 due to the lower-than-expected cost of debt. Suntec is one of the best proxies, in our view, to the office market / revitalization of the Marina Bay area today in terms of both exposure and valuations. With an estimated total return of 19.1%, maintain BUY.