Suntec – Phillip

Financing details of MBFC Acquisition

• Advance distribution for period 1 Oct – 8Dec approx 1.677 cents

• Private placement priced at $1.37 per unit raised $428.8 million

• Maintain Hold, target price $1.37  

Suntec REIT announced the financing structure of the MBFC acquisition. Suntec REIT raised gross proceeds of $428.8 million through a private placement and according to the circular sent out, it will also draw down $1,105 million of debt to fund the balance of the acquisition cost. 313 million new units were to be issued pursuant to the private placement at a price of $1.37 per unit. The new units issued represent 16.9% of the total units before the private placement. The issue price was at a discount of 4% to the volume weighted average price of S$1.43 on 26 November 2010 and the issue was 3.1 times oversubscribed. In connection with the private placement, Suntec REIT will be paying out an advanced distribution to existing unitholders for the period 1 Oct – 8 Dec 2010, prior to the listing of the new units on 9 Dec. The REIT manager expects the advance distribution to be approximately 1.677 cents per unit. Post acquisition, we estimate Suntec REIT will have total debt of $2.8 billion which will bring gearing up to 42%.

The private placement was well oversubscribed at 3.1 times which reflects investor’s preference for downtown grade A properties. This we believe is also the catalyst for the stock. Minority unitholders may again feel disadvantaged by the inability to participate in the private placement, the first time being in Dec 2009. At the current price, Suntec REIT is trading at approximately 15% discount to book value and we are projecting 6.8% dividend yield for FY11E. However our concern with Suntec REIT lies mainly in its gearing. At 42%, it is one of the higher leveraged REITs and the gearing will also limit it on making further acquisition. Deleveraging will have to be carried out at some point. We raised our target price slightly from $1.34 to $1.37 and maintain our Hold recommendation.