Suntec – DBSV

Remaking of Suntec City

• Long awaited remaking of Suntec City announced

• Earnings and NAV accretive post AEI

• Maintain Buy, TP adjusted to $1.46 to reflect the near term earnings impact

$410m makeover. Suntec REIT has announced the long-awaited asset enhancement plans for Suntec City. The exercise involves a $230m makeover at Suntec Mall and $180m enhancement and conversion of Suntec Singapore into retail space. The project will be completed over 4 phases from mid-2012 to 2015, and transform Suntec City into an exciting shopping and MICE destination. The property will be refreshed with new facades and seamlessly integrated with the 2 current MRT stations. The mall will also be repositioned with the creation of duplex stores housing a mix of new and new-to-market brands while lower yielding space will be decanted into higher yielding space. Tenant mix will also be re-jigged with a selection of anchors and mini anchors offering a wider choice of F&B outlets. At the same time, L1&2 of Suntec Spore will be converted into prime retail space and increase total retail NLA at Suntec City by 14% from 855,000sf currently to 980,000sf. Suntec’s $230m portion will be funded with the $177m sales proceeds of CHIJMES and debt while the $180m Suntec Spore portion will be funded by debt at the entity level.

Reposition, refresh, remix. We view this exercise as positive for Suntec City, as the property is close to 17-20 yrs old, and will enable it to better compete with surrounding properties. Gearing could climb to 44-45% based on 10% ROI for both the mall and convention space but we see a potential for downward bias if Suntec Spore AEI space is revalued as retail property. More importantly, with the phased AEI, capex needs for the first two years will be more than met with the sale proceeds of CHIJMES. During the enhancement period, DPU could be affected by 2-4% but Suntec would use part of the sale proceeds of CHIJMES to mitigate the temporary dip. When completed post 2015, DPU would likely be boosted by at least 3%.

Maintain Buy. We remain positive on Suntec Reit as we believe there is strong value creation post AEI. Our TP is lowered by 5% to $1.46 to take into account the potential near term volatility in earnings. Maintain Buy with FY12 yield of 6.7%.