Raises stake in Suntec Convention

• Takes effective 60.8% stake in Suntec Convention

• Accretive deal but impact depends on extent of AEI

• Maintain Buy and S$1.69 TP

Takes an effective 60.8% stake in Suntec Convention Centre. Suntec has announced it is buying a 51% stake in Harmony Partners Investments Ltd, which owns 80% of Suntec Spore International Convention Exhibition Centre for S$114.75m. Including its earlier 20% interest in the development, the deal will give the group an effective 60.8% stake in the convention centre. The vendors include Bright Assets Enterprise, Crescendo Investments, KCY Investments and Clavon Capital. The acquisition value is based on the latest valuation (by Colliers International) of S$400m for the property (vs the purchase valuation of $235m in Aug 2009). Suntec Convention comprises about 1msf of floor space spread over 6 levels.

Deal seems fair but accretion quantum depends on extent of AEI. We see the deal as accretive to Suntec given that the S$400m translates to an implied value of S$400psf for the prime floor space. Gaining majority ownership of the property would also enable the group to conduct AEI activities to improve the usage and efficiency of the property together with adjoining Suntec Mall more easily. However, the extent of the accretion would depend on further details on the potential AEI initiatives and capex required during this period. Suntec intends to fund the acquisition through debt, which will raise their see-through gearing to 41.6%, slightly ahead to the Sreit sector gearing level. In terms of immediate impact, there will be a boost to its book NAV from S$1.804 to S$1.87 given the higher value of its initial 20% stake, post revaluation. In addition, the greater ownership and contributions would increase its DPU by 1.2%.

Maintain Buy. We are retaining our Buy call on the stock. Suntec offers FY11 and FY12 DPU yield of 6.6% and is trading at undemanding 0.77x P/Bk NAV. Maintain Buy with TP of S$1.69.

Preparing for asset rejuvenation

• Slightly above. 2Q11 DPU of 2.53 S cts was slightly above our and consensus estimates, forming 27% of our FY11 forecast. 1H11 DPU formed 52% of our full year estimate. The outperformance came mainly from lower-than-expected interest costs. Rentals and occupancy for Suntec City Mall continued to weaken though we believe that this could be in preparation for any potential asset enhancement initiatives to rejuvenate the mall. Likewise observations by other office landlords, leasing momentum appears to have slowed though occupancy within its office portfolio remains strong. We tweak our FY11-12 DPU estimates by -2% to +2% for lower interest expense in FY11-12 and a lower income support assumption in FY12. Our DDM-based target price is, however, unchanged at S$1.61 (discount rate: 8.1%). We maintain our NEUTRAL call. Potential re-rating catalysts are stronger than-expected rentals and AEIs at Suntec City Mall.

• Net property income (NPI) slipped 1% yoy due to weaker performance from Suntec City Mall. Distributable income, however, rose 22% yoy from contributions from Marina Bay Financial Centre Phase 1 (MBFC 1), which was offset by lower income support from One Raffles Quay. 2Q11 DPU was, however, flat yoy due to a larger unit base from a unit issuance to partly fund the acquisition of MBFC 1.

• Slower office leasing momentum. Suntec City’s office occupancy remained stable in 2Q11 at 99.5% with negative rental reversions appearing to have stabilised on a qoq basis. As the pace of office leasing momentum is likely to have slowed, achieved rents climbed only 1% (vs. 1Q11: 13%) from S$9.22 psf to S$9.28 psf, notwithstanding the minimal remaining office leases expiring in FY11. Management, however, notes continued demand for office space from tenants within the IT, oil & gas, legal and shipping industries.

• Preparing for rejuvenation of Suntec City Mall. Committed retail passing rents (S$10.16 psf, -1% qoq) drifted lower for the fifth quarter in 2Q11. Occupancy has also slipped by 0.8% pts to 97.1% though management has successfully renewed and lowered lease expiries to about 12% (1Q11: 19%) by retail portfolio (by NLA) in 2Q11. With a weakening portfolio, we anticipate plans for AEIs to rejuvenate the mall with any AEIs likely to be debt-funded.

Suntec Reit DPU for Q2 edges up

Income available for distribution jumps 22.3% to $56.2m

SUNTEC Real Estate Investment Trust’s income available for distribution rose 22.3 per cent to $56.2 million for the second quarter ended June 30.

However, distribution per unit (DPU) for Q2 2011 came in only marginally higher at 2.532 cents as compared with the 2.528 cents recorded during the same period a year ago. This gives an annualised yield of 6.6 per cent based on yesterday’s closing price of $1.535.

Coupled with distributions in the first quarter of 2011, Suntec Reit’s H1 2011 DPU now stands at 4.92 cents.

ARA Trust Management (Suntec) Ltd, the manager of Suntec Reit, said yesterday that the gross revenue for the second quarter of $61.3 million came in 1.8 per cent lower year on year due to weaker office and retail revenues.

Gross revenue for H1 2011 stands at $122.3 million, down about 2 per cent year on year.

Correspondingly, Q2 2011 and H1 2011 net property income for the Reit came in 1.1 per cent and 1.7 per cent lower year on year at $46.9 million and $93.6 million respectively.

But overall committed occupancy remains stellar as at end June. The committed occupancy of Suntec City Office Towers stood at a high of 99.5 per cent while the Park Mall office maintained full occupancy take-up.

Similarly, amongst the Reit’s retail properties, committed occupancy stayed stable at 97.1 per cent for Suntec City Mall and 100 per cent for both Park Mall and Chijmes.

For jointly controlled properties, One Raffles Quay attained full occupancy status while MBFC Properties’ committed occupancy numbers came in at 97.4 per cent.

The overall committed occupancy for Suntec Reit’s office and retail portfolio stood at 99.1 per cent and 97.7 per cent respectively as at June 30.

Suntec Reit’s shares were last traded at $1.535.

Suntec Real Estate Investment Trust reported a 22.3 per cent increase in second-quarter distribution income of S$56.18 million, compared to S$45.93 million a year ago.

The distribution per unit for the quarter ended Jun 30 amounted to 2.53 Singapore cents, translating to an annualised distribution yield of 6.6 per cent.

Gross revenue for the quarter was S$61.3 million, marginally lower that last year by 1.8 per cent.

The gross retail revenue was S$31.9 million, 2.7 per cent lower than a year ago. This was mainly due to lower rental income achieved for Suntec City Mall.

The gross office revenue was S$29.4 million, 0.7 per cent lower than the previous corresponding time period.

Suntec REIT expects to exceed the forecast distribution per unit for FY2011.

Improving office segment offset by weak retail

1Q11 res ults in-line with expectations. Suntec REIT (Suntec) reported 1Q11 DPU of 2.388S¢ (+3.1% QoQ; -5.0% YoY), which represents 25% of our FY11 estimate. Net property income fell 2.4% YoY (-1.2% QoQ) mainly due to lower rental income from retail space (Suntec City Mall and Chijmes). Meanwhile, dividend income from JV rose 123% YoY to S$6.5m (+94.3% QoQ) due to maiden full three-month income contributions from MBFC during 1Q11 following the completion of the acquisition of a 33% stake in MBFC in 9 Dec 2010. At its current price, Suntec is trading at 6.2% yield and 3.7% spread, which is higher than pre-crisis mean spread of 2.4%. Maintain BUY with unchanged TP of S$1.76, derived based on DDM (COE: 8.4%; TGR: 3.0%).

Retail rental growth remains sluggish due to new supply in city centre. In spite of strong retail sales and tourist arrivals, retail rental growth has been sluggish in the prime city centre due to 1) new supply of retail space injected during the last two years, and 2) negative retailer sentiments towards rising inflation and hence, higher operating costs. However, we expect the retail rental to remain stable in the quarters ahead, underpinned by visitors’ arrivals which are expected to stay strong. For 1Q11, retail revenue accounted for 53% of total gross revenue excluding the 33% interest in ORQ and MBFC.

Office leases buoyed by higher occupancy and average rent. During 1Q11, Suntec City office space saw an increase in occupancy rate to 99.5% (+0.4ppt QoQ, +4.0% YoY), significantly higher than core CBD occupancy rate of 94.1%. In addition, Suntec City office space saw a higher average rent for leases secured during 1Q11 at S$9.22 psf (+13% QoQ; +30% YoY). This is in line with the strong growth of Grade A office rents which averaged S$9.90 psf in 1Q11 (+10% QoQ; +22% YoY).