Suntec Reit dips, ARA surges on MBFC deal

Analysts guarded on deal’s impact on trust but upbeat on fund manager

SUNTEC Real Estate Investment Trust endured a sell-down on the stock market yesterday after investors learnt of its planned $1.496 billion property purchase.

In contrast, ARA Asset Management – whose unit manages Suntec Reit – saw its share price surge to its highest level this year on the back of the same news.

Suntec Reit said on Tuesday evening that it is buying a one-third stake in some properties in Phase One of Marina Bay Financial Centre (MBFC) from Cheung Kong Holdings and Hutchison Whampoa. Its units ended trading at $1.56 before the announcement.

Yesterday, Suntec Reit fell as much as five cents or 3 per cent to an intraday low of $1.51. But it later recovered slightly to close at $1.54 – two cents down. Some 9.79 million units changed hands.

Views on how the deal would affect Suntec Reit ranged from the guarded to the positive. Moody’s Investors Service put on review for possible downgrade the Reit’s Baa1 corporate family rating and Baa2 senior unsecured debt rating.

‘The large transaction size, if substantially funded via debt, may pressure its ratings,’ said Moody’s senior vice-president Philipp Lotter.

Analysts from Deutsche Bank expect a slight 2.8-3.5 per cent accretion to Suntec Reit’s FY2011 distribution per unit from the deal. Taking into account other factors, they raised the target price for the counter to $1.65 from $1.58.

Sentiments surrounding ARA were more upbeat. Its share price, which closed at $1.29 on Tuesday, rose eight cents or 6 per cent to an intraday high of $1.37 yesterday.

The real estate fund manager gave up some of these gains to close at $1.33 – four cents higher.

Two research houses raised their target prices for ARA. ‘ARA, as the manager of Suntec Reit, stands to reap 1 per cent in acquisition fees or $15 million in FY2011,’ said CIMB’s Janice Ding, who upped the target price to $1.57 from $1.35.

DBS Vickers revised its target price to $1.65 from $1.30. ‘MBFC will form part of the asset under management (AUM) of Suntec Reit, thus increasing ARA’s recurring fee income base,’ said analyst Derek Tan.

‘ARA’s goal of $20 billion in total AUM by 2012 appears within reach.’

•3QFY10 of $63.2 million, net property income of $50.6 million, distributable income of $46.2 million

•3QFY10 DPU of 2.502 cents

•Acquiring 1/3 MBFC

•Maintain Hold, pending more details of acquisition

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Suntec REIT recorded 3Q10 revenue of $63.2 million (+2.1% y-y, +1.3% q-q), net property income of $50.6 million (+7.6% y-y, 6.7% q-q) and distributable income of $46.2 million (- 3.2% y-y, +0.6% q-q). 3Q10 DPU was 2.502 cents (-14.3% y-y, -1.0% q-q). Essentially we note the office portfolio has been improving in the past five quarters with occupancy edging up every quarter. Reversionary rent for leases secured in the quarter at Suntec City Office was $7.39 psfpm. Although this still represents a decrease of approximately 45% from the peak in two years ago, it has stayed relatively constant in the past five quarters and we believe the trough is already past. Like we mentioned in previous reports, this is a conscious effort by management to retain tenants and gain occupancy rate in the prospect of the completion of new supply of office space in the vicinity. The retail portfolio has also shown consistent results. Revenue contribution breakdown from the office and retail portfolio is 47% and 53% respectively, which has been steady in the past five quarters as well.

Additionally, Suntec REIT announced that it is proposing to acquire one-third interest in Marina Bay Financial Centre (MBFC). The purchase price is $1,495.9 million inclusive of an income support of $113.9 million over 60 monthsThe REIT has not determined the method of funding and will announced in due course. Fig 1. Revenue breakdown ($’m) vs occupancy breakdown (%)

Buys one third share of MBFC1

• Results in line, topline +2.1% on higher office income

• Buying MBFC1 for $2400psf

• Maintain Buy call, TP $1.66

No surprises in Q3 results. Revenue was up 2.1% yoy and 1.3% qoq, lifted by higher office occupancy of 98.5% and better office rental income. Office rents at Suntec office improved to $7.39psf/mth. NPI was up 7.6% yoy on lower cost to income ratio of 20%. However, distribution income dipped 3.2% to $46.2m (DPU: 2.5cts) largely on increased interest expenses. The group revalued up portfolio by 3.6% translating to NAV of $1.828/share. Going forward, Suntec has c14% of office and 27% of retail NLA due for reversion in 2011 and we expect office rents to show some uptick while retail component to remain stable.

Interest savings from refinancing. Recent refinancing exercise of $700m due in FY12 are likely to lower its current overall cost of debt of 3.77% as the new loans were concluded at a lower spread of 1.5%, as well as smoothen out the group’s debt maturity profile. The impact is likely to be felt from FY11.

Buys 1/3rd MBFC1 at $2400psf. Suntec has announced its plan to buy a one third share of MBFC1 from Cheung Kong for $1495.8m, inclusive of a $113.9m income support payable over 60 months or $2400psf (excl the income support payable). This deal is viewed as a long-term strategic positive as enhance the overall quality of its office portfolio with a prime office property. The actual impact is difficult to ascertain pending details of financing to be released. The deal is subject to minority shareholder’s approval.

Retain current recommendation. We are tweaking our FY11 numbers by 3.1% to reflect the impact of recent refinancing exercise but exclude the effect of the MBFC1 acquisition. Maintain Buy call pending more information on the transaction. Based on FY10 and FY11 DPU of 9.8cts and 9.7cts, Suntec is trading at decent DPU yields of 6.3-6.2%. Our target price of $1.66 offers 12% total return.

Limelight stolen by MBFC acquisition

• In line; maintain Outperform. 3Q10 DPU of 2.5 Scts met our expectation but was slightly above consensus, forming 25% of our forecast (9M10 at 77%) and 26% of consensus. The limelight, however, was stolen by the announcement of its acquisition of Marina Bay Financial Centre (MBFC 1). See our separate note “Acquisition of MBFC Phase 1” also released today. We keep our DPU estimates intact. Our DDM-based target price, however, has been raised to S$1.63 (discount rate 8.1%) from S$1.60 as we roll over to end-CY11. Maintain Outperform on further improvements in the retail and office outlook. We see near-term catalysts from more concrete signs of DPU accretion from the latest acquisition.

• 3Q10 NPI grew 7.6% yoy, led mainly by a 2.1% yoy increase in gross revenue on stronger office contributions and a lower property tax. 3Q10 DPU declined 14% vs. a milder 3% decline in distributable income due to deferred units payable to the original vendors of Suntec City.

• Positive office occupancy. Portfolio occupancy continued to strengthen on the back of better office occupancy which mitigated lower retail occupancy in the quarter. Office occupancy was up qoq for the fifth consecutive quarter to 98.5%. Retail occupancy at 97.6% was, however, down 1% pt qoq and 2% pts yoy.

• Improved debt maturity profile. Asset leverage was 32.9% at end-3Q10. In Oct 10, Suntec REIT secured a S$700m term-loan facility, which has been used to prepay a S$575m 3-year loan maturing in FY12 and also to refinance part of a S$400m club loan maturing in FY11. This was secured at a blended all-in interest margin of 1.5%, much lower than its average all-in financing cost of 3.77% as at end-3Q10.

• Positive revaluation of assets. Suntec REIT’s portfolio has been revalued at S$5.3bn (including One Raffles Quay) vs. S$5.2bn in Dec 09, with the revaluation driven mainly by higher valuations for Suntec City (S$3.9bn, retail S$1,844 psf, office S$1,819 psf) and ORQ (S$980m, S$2,200 psf).