Suntec – DBSV

Divestment of CHIJMES is a small but nice surprise

• Divestment of Chijmes at S$177m reaped S$39.5m gains

• Positive: proceeds to fund planned AEI works at Suntec Mall

• Gearing down to 38.5%, minimal impact on earnings

Divestment of Chijmes. Suntec REIT announced that it has divested Chijmes for S$177m or S$2,218 psf on a NLA basis, which implies a 3.9% annualized yield on Chijmes NPI for YTD Sep 2011. The selling price represents 23% premium over the latest valuation done (15th Oct 2011, S$143.7m) and 38.2% higher than its purchase price of S$128m paid in late 2005. Suntec is expected to reap a divestment gain of S$39.5m over its Dec 2010 value carried in its books. The acquirer of Chijmes is understood to be a consortium of investors, including Perennial Real Estate.

Positive move that unlocks value. Chijmes, located in the entertainment heart of downtown Singapore, is an award winning gazetted national monument, which houses mainly entertainment and F&B tenants. While the property performance has been consistent, in our view it may not be a good fit to Suntec Reit’s current portfolio that comprises prime and Grade A office and retail space in the Marina and Marina Bay areas. As such, we view this sale positively, as it will help to unlock portfolio value. The net proceeds could potentially fund the planned asset enhancement activities at Suntec City Mall to yield higher returns.

Gearing down to 38.5%, minimal impact on earnings. Chijmes contributes 2.3% and 2.4% to Suntec reit’s NLA and NPI respectively, hence impact on earnings (>2%) is minimal. Meanwhile, gearing level is expected to head down from 39.8% to 38.5%, assuming that the net proceeds are fully utilized to repay debts. Maintain BUY at a target price of S$1.54.