Lower dividends for lower gearing

SUN announced that it has placed out 218m new units at an issue price of S$1.605 per unit. According to its manager, the gross proceeds will be used to pay down debt. Although gearing will be lowered to 35%, DPU for FY14-15 is expected to drop correspondingly, by 6.8%. We maintain our Add rating with a lower DDM-based (discount rate: 8.0%) target price after incorporating the DPU dilution. Catalysts are still expected from strong earnings from the Phase 1 and 2 of the completed AEI at Suntec City and additional earnings from Leighton Tower in the more long term scenario.

What Happened

SUN just announced a placement of 218m new units (c.9.6% of its share base) at an issue price of S$1.605 apiece to a consortium of institutional and other investors. Gross proceeds will approximate S$350m with net proceeds of S$341.4m, after deducting underwriting, selling, management-fee and other expenses. The issue price represents a 5.3% discount to its last closing price. According to SUN’s manager, the gross proceeds (S$341.4m) will be used to repay debt.

What We Think

An estimated S$780m of SUN’s debt (c.24% of total debt) is due for refinancing this year. Using gross proceeds from this placement and from a recent issue of S$310m medium-term notes (at 3.35% due in 2020), it can repay more than 83% of its debt due in FY14. With the paydown, its FY14 leverage is expected to dip to 35% from its last reported 38% in 4Q13. Although we are mildly surprised by this placement, particularly since interest costs are still low (SUN’s all-in cost was estimated at 2.5% in 4Q13), we believe that the purpose of the placement is to diversify SUN’s sources of funding, while lowering its gearing, before any hike in interest rates. However, as a result of this placement, DPU could be diluted by 6.8% for FY14-15. Accordingly, we lower our DDM-based target price to S$1.83.

What You Should Do

Although we did not expect the placement, we maintain our Add rating, in view of SUN’s bright earnings prospects over the next few years, supported by completed AEI at Suntec City and additional income from Leighton Tower in 2016.

Cash call for strength and growth

• To raise S$341.4m in net proceeds
  
• Intention to repay existing debt
  
• Advanced distribution of ~2.096 S cents
  

Private placement of 218.1m new units

Suntec REIT announced yesterday that it will be issuing 218.1m new units at S$1.605 apiece following the close of the private placement to institutional and other investors. The issue price is nearer to the upper end of the range of S$1.575-S$1.615 proposed during the launch of placement, and represents a discount of 4.7% to the VWAP on 18 Mar (before placement announcement). ~S$341.4m in net proceeds will be raised, after deducting the expenses relating to the cash call, while the unit base is expected to increase by 9.6% with the issue of new units (expected on 27 Mar).

Strengthen balance sheet and position for growth

The move came as a surprise to us as Suntec REIT had explicitly expressed that it has sufficient resources to fund its growth plans just a quarter ago, and that it was trading at a 21% discount to book value. According to management, the current intention is to use the proceeds to repay its existing debt, which is likely to reduce its debt burden and aggregate leverage from 39.1% as at 31 Dec 2013 to 35.0%. However, given the change in stance, we believe that Suntec REIT may possibly be beefing up its financial strength for potential growth opportunities in the near term. In any case, we note that Suntec REIT will no longer have any refinancing needs until 2015 after the completion of the placement and refinancing of the loan due in Jun 2014, and that the weighted average debt duration will improve from 2.4 years to 3.6 years.

Maintain BUY with lower fair value of S$1.85

In connection with the placement, Suntec REIT also intends to make an advanced distribution of ~2.096 S cents/unit for the period from 1 Jan to 26 Mar 2014 (being the day prior to the issue of new units). With just five days to the quarter close, this seems to show that Suntec REIT’s performance is only moderately affected by the concurrent close of Phases 2 and 3 spaces of Suntec City in 1Q14. We lower our fair value slightly from

S$1.90 to S$1.85 after factoring the enlarged unit base and lower finance costs due to debt repayment. Maintain BUY on Suntec REIT as upside potential remains attractive.

SUNTEC REIT RAISING $341M TO REPAY DEBT

Suntec Reit is issuing 218.1 million new units at $1.605 apiece in a private placement. The move will increase the unit base by 9.7 per cent, and could dilute distributions per unit by 3.9‐8.4 per cent from FY14 to FY16.

Suntec Reit said the issue is likely to reduce its gearing from 38 percent to 33.8 per cent. Its aggregate leverage will also improve from 39.1 to 35 per cent. Noting that the issuance will improve capital structure and credit profile, it added that the fund‐raising exercise will “provide Suntec Reit with greater financial capacity and competitive advantage to capitalise on potential growth opportunities”.

The issue price per unit, a