• Investors are expected to welcome Suntec’s $410 mln asset-enhancement initiative (AEI), largely because it has no plans to tap existing unit-holders for fresh funds.

• The 4-phase AEI, starting in 2012 through 2015, is to be largely funded by the $177 mln proceeds from the sale of Chjmes and bank borrowings.

• While only time will tell whether CEO Yeo See Kiat’s optimism will pan out (rentals to rise to $12.59 psf from current $10.10 ), we believe investors accept the need for some kind of makeover for the 17 year-old “institution”, especially since:

(a) Suntec Reit raised its stake in the Convention Centre (Suntec Singapore) to >60%.

(b) minimal impact on the distribution to unitholders.

(c) completion of Downtown Line by the time the proposed AEI is completed (Suntec Citry is already being served by the Circle Line).

• Indeed, the expected 14% increase in retail space (by 125,000 sf to 980,000 sf) will come from the conversion of the first 2 levels of Suntec Singapore.

• We believe Suntec Reit merits a BUY.

• Based on the latest annualized DPU of 10.05 cents, yield is 8.1%.

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%.

Suntec City to get $410m makeover

Project set to boost retail space, spruce up exhibition venues

Suntec City is set to undergo a $410 million asset enhancement initiative (AEI) that is set to boost its retail space and spruce up its exhibition venues .

To be completed over four phases, the refurbishment project will comprise $230 million on Suntec City Mall, and $180 million on Suntec Singapore International Convention and Exhibition Centre (Suntec Singapore).

Scheduled to take place between mid-2012 and 2015, retail net lettable area (NLA) is expected to increase by 14.6 per cent, from its current 855,000 sf to 980,000 sf, following the conversion of the first and second floors of the convention centre into retail use.

Post-AEI, Suntec City Mall’s net property income is expected to increase by 33 per cent, or $23 million, representing a 10.1 per cent return on investment for unitholders and an 84 per cent increase in capital value over capital expenditure, based on the current capitalisation rate of 5.5 per cent, said Suntec reit.

Overall, stabilised rents are projected to increase by 25 per cent, the company said.

Yeo See Kiat, chief executive of ARA Trust Management (Suntec) Limited, which manages Suntec Reit, said: ‘We have carefully planned the implementation phases to minimise disruptions to both tenants and visitors. The AEI, when completed, would significantly enhance value to all our stakeholders.’

According to Suntec Reit, phases one and two of the AEI will cost approximately $55 million and $75 million respectively, whereas phase three and four will cost approximately $50 million respectively.

The $230 million capital expenditure will be funded by sale proceeds from the divestment of Chijmes and bank borrowings.

Suntec Reit had announced last month that it was selling Chijmes for $177 million to an entity whose shareholders include Pua Seck Guan’s Perennial Real Estate group and OSIM boss Ron Sim.

‘During the execution of the AEI works, we would use part of the sale proceeds from Chijmes to mitigate the temporary dip in DPU (distribution per unit),’ said Mr Yeo.

Suntec Singapore, of which Suntec Reit holds an effective interest of 60.8 per cent, will fund its capital expenditure of $180 million by its own bank borrowings.

The enhancement exercise is scheduled to start mid-2012 through to 2015, and will feature a diverse and wide range of food and beverage choices, new restaurant concepts, stylish cafes, and new food courts.

Part of the Suntec City Mall rebranding exercise will include bringing in more F&B options, said the company – the new tenant mix will feature 35 per cent F&B outlets; 35 per cent anchor/mini anchor (anchor stores, hyper market, 15-screen cineplex, fitness centre); and 30 per cent specialty retail space (specialty boutiques, fast fashion and accessories, new-to-market concept stores).

Other proposed enhancements include new retail entrances, duplex and anchor stores, a new sky garden featuring alfresco restaurants and watering holes, direct connectivity from the convention centre into the mall, and a dedicated MICE (meetings, incentives, conferences, and exhibitions) entrance with express escalators.

The redesign of Suntec Singapore will also pay particular attention to flexibility, functionality, and convertibility, while integrating a high degree of advanced technology, which includes a two-storey interactive digital wall and a modernised facade.

The convention centre will operate from levels two to seven, with a grand entrance on level three, served by express escalators from the ground level.

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.

Suntec Reit sells Chijmes for $177m to Pua-linked entity

OSIM’s Sim holds stake in the entity; Pua, Sim also linked to a nearby project

SUNTEC Real Estate Investment Trust (Suntec Reit) is selling Chijmes for $177 million to an entity whose shareholders include Pua Seck Guan’s Perennial Real Estate group and OSIM boss Ron Sim.

Mr Pua and Mr Sim are also joint majority shareholders (40 per cent stake) in the nearby Capitol project, which will have retail/theatre, hotel and residential components.

According to a Perennial spokesperson, this acquisition provides good synergistic opportunities between the Chijmes and Capitol sites.

‘We like this site because it’s a good opportunity to own an iconic heritage landmark commercial site, and it’s very rare to get an opportunity to invest in such a large commercial site right in the downtown core of Singapore CBD (central business district), with a low plot ratio of 0.8,’ said the Perennial spokesperson.

HSBC Institutional Trust Services (Singapore), as trustee of Suntec Reit, entered into a property sale agreement with PRE 8 Investments Pte Ltd for the 154,062 sq ft plot located along Victoria Street.

With a gross floor area of 127,793 sq ft, the $177 million price tag translates into about $1,385 psf ppr (per sq ft per plot ratio). The area was valued at $143.7 million by DTZ Debenham Tie Leung (SEA) as at Oct 15, placing the divestment at 23.2 per cent above the valuation.

Suntec Reit is expected to recognise an estimated gain of about $39.5 million following the divestment.

The sale of Chijmes follows an expressions of interest exercise conducted by Colliers International.

According to Suntec Reit’s results for the third quarter ended Sept 30, the property posted revenue of $2.7 million and net property income of $1.8 million during the quarter.

Going forward, PRE 8 Investments intends to spend some $40 million to rejuvenate the asset.

‘In terms of efficiency of the asset, it will be enhanced; the tenancy mix will be reviewed and optimised; and in terms of ambience, a lot can be done to improve and blend it with the precinct. Over time, we hope to enhance the rental revenue from this asset.’

Chijmes has 79,794 sq ft of net lettable area and includes several conservation buildings and two gazetted national monuments – Chijmes Hall (the former CHIJ Chapel) and Caldwell House.

Chijmes is on a site with a remaining lease of about 79 years. It has 97 car park lots and is located opposite Raffles City and the City Hall MRT Station. Tenants include Lei Garden Restaurant and Harry’s Bar.

The completion of the divestment is expected to be sometime in January 2012.