Singapore Reit News

Long-Awaited Placement

Suntec REIT announced that it has placed out 128.5 million new units at an issue price of $1.19 per unit to raise gross proceeds of $152.9 million in a private placement.

The placement units are priced at a discount of 6.5% to the volume weighted average price of $1.27 on 10 Dec 2009. The REIT manager intends to use the net proceeds of approximately $149.0 million to repay debt, bringing down total debt from $1.88 billion to $1.73 billion. Gearing will improve from 34.3% to 31.5%. The new units represent 7.7% of the total units. The new units are expected to commence trading on 22 Dec 2009.

We feel that the fund raising was long overdue, considering that most REITs have completed their recapitalization in the past few quarters. Furthermore the year-end portfolio revaluation might see a downward revaluation to Suntec’s asset and so the fund raising provides some degree of buffer. In the current credit environment, most REIT managers prefer to keep gearing below the 35% level as it allows them the flexibility to gear up if there is any acquisition opportunity.

Management has guided a distribution for the period of 1Oct – 21 Dec 2009 of approximately 2.44 to 2.54 cents per unit. Together with the distribution for the prior 3 quarters, total distribution for the year is at least 11.26 cents, which has exceeded our original forecast of 10.56 cents. In view of the year-end, we rolled forward our projections to FY10F. We have a DPU forecast for FY10F of 8.46 cents, which is
lower than FY09F mainly due to the additional units from the placement as well as the issue of the last two installments of the deferred payment units (69 million units). Our fair value is raised slightly from $1.13 to $1.14 and we keep our Hold recommendation.

Suntec Reit raises $149m from placement

Aggregate leverage cut to 33.4% if all proceeds go towards debt repayment

SUNTEC Real Estate Investment Trust (Suntec Reit) yesterday raised net proceeds of about $149 million from a private placement to reduce debt, joining a host of other Reits that have made cash calls this year.

Suntec Reit called for a trading halt in the morning to announce the launch of the private placement. The Reit manager said that book-building closed within three hours. Suntec Reit managed to place out 128.5 million new units at $1.19 apiece.

The issue price was a 6.5 per cent discount to the volume weighted average price of $1.2724 per unit, based on trades done on Thursday. The new units represent around 7.7 per cent of the number of units in issue on Thursday.

According to Suntec Reit, the private placement was more than five times oversubscribed by existing unitholders and new investors. More than 60 institutional investors bagged the new units.

Assuming that all net proceeds go towards debt repayment, its aggregate leverage is expected to fall from 36.2 per cent at Sept 30 to 33.4 per cent.

Presentation slides on the Reit’s third-quarter 2009 results show that it had total debt of $1.877 billion at Sept 30. No debt will mature in FY2010, but around $532.5 million will be due in FY2011.

‘The proceeds from the private placement will strengthen Suntec Reit’s balance sheet and put us in a stronger position to take advantage of growth opportunities,’ said Yeo See Kiat, chief executive of Reit manager ARA Trust Management (Suntec).

In a report on Wednesday, OCBC Investment Research flagged a potential dilution risk in the counter. ‘With declining office income and book value risk, Suntec could decide to go the acquisition route in 2010,’ said analyst Meenal Kumar. ‘It is likely to keep aggregate portfolio gearing unchanged or lower, necessitating a combination of both equity and debt financing on any purchase.’

DMG & Partners analyst Jonathan Ng believes that Suntec Reit is expecting potential asset write-downs at year-end, and is preparing to keep its gearing below 40 per cent.

‘We expect Suntec to register a 7 per cent devaluation on its book in Q4 2009 to $5 billion, from the current $5.4 billion,’ Mr Ng said in a note yesterday. ‘There are unlikely to be further cash calls unless further asset write-downs are expected in H2 2010.’

He estimates that there will be a ‘mild’ dilution of 1.2 per cent, or 0.11 cents per unit, to the Reit’s distribution per unit in FY 2010.

Suntec Reit units closed unchanged at $1.28 each yesterday after resuming trading in the afternoon.

Several Reits, such as Ascendas Reit and Fortune Reit, have raised funds from the stock market this year. Analysts expect more cash calls next year, as the sector continues to pare debt or build capacity for acquisitions.

A positive move

• Private placement of S$152.9m
• Balance sheet strengthened, minimal DPU dilutive impact
• Maintain Buy with TP of $1.38

S$152.9m private placement. Suntec Reit has completed a private placement of 128.5m new units at S$1.19 each, which was >5x oversubscribed. The issue price represents a 6.5% discount to the VWAP price of $1.2724 and 4.6% discount to the adjusted VWAP of $1.2475. Gross proceeds of S$152.9m (net S$149m) will be used to reduce bank borrowings. The new units will not be entitled to the advance dividend distribution.

Minimal dilutive impact. We view this exercise as a positive strategic move on the group’s capital management exercise. Post placement, gearing is anticipated to decline to 31.5% from 34.3%, increasing the flexibility of its balance sheet. In terms of DPU impact, FY10 DPU estimate of 9cts is lowered by 3.3% to 8.7cts, after adjusting for interest savings.

Maintain Buy. We maintain our Buy call for Suntec. Post placement, FY10 DPU yield remains attractive at 6.8%, on the higher end of its comparable peer range. Suntec’s properties are well located and is expected to benefit from the expected increased vibrancy of the Marina Bay area when the Marina Bay Sands IR is opened. Our adjusted target price of $1.38 offers potential absolute return of 14.6%.

Wait For Clearer Signals

Downgrade to Equal-weight, wait for clearer signals: Suntec Reit has out-performed the STI by 19% from 3 months ago and is now marginally below our price target. Given the recent strong share price performance and our view that fundamentals have not substantially improved to warrant a change in our DCF-driven valuation, we are downgrading Suntec Reit to an Equal-weight rating.

Rental decline appears to be stabilizing, but for Office rents – rent increase is still some time away: Office rental declines appear to be stabilizing, with office rents down 12% and down 13% in 2Q09 and 3Q09 respectively, having declined 55% since the peak in 3Q08. 3Q09 showed a marginal positive net absorption of 32k sq ft and anecdotal evidence suggests that leasing activity has picked up recently given the
stabilization of the global and Singapore economy. However, given the large upcoming supply of ~2.6m sq ft in the next 2 years, we think it is too early to hope for positive office rental growth and we expect rents to bottom in 2011. Retail rents paint a more upbeat tone, with median central rents down 7% from the peak and down 1% QoQ. A study of upcoming retail supply in our report “Look Through The Cycle”, dated October 22, 2009, suggests that upcoming supply is well spread out in Singapore and we expect positive retail rent growth of 4% in 2010 as demand picks up with the improving economy and opening of two new integrated resorts.

What’s next: In the near term, we believe that the market will be focused on Suntec Reit’s 2009 asset valuations. We only expect a relatively small 4% decline in asset values, and for gearing to reach 38% by the end of 2009. We believe the risk of Suntec Reit undertaking an equity raising to shore up its balance sheet post asset devaluation is low, but believe the perceived risk will continue to be an overhang on the share price until details of the asset valuations are known.

Relative value & retail attraction

Office income at turning point. In 3Q09, Suntec REIT reported a decline of 11.4% QoQ and 41.9% YoY in average achieved Suntec City Office rents to S$7.30 per square foot per month. 22.2% of the REIT’s total office NLA (including One Raffles Quay) expires in 2010. Office REITs have yet to feel the full brunt of falling rents because of the time lag created by the three-year leasing cycle. But 2007 leases, which were secured as the market began its meteoric ascent, finally begin to expire in 1Q10. We believe we have approached the inflection point where spot rents are lower than passing rents on expiring leases, impacting revenue and distributions unfavorably.

Potential dilution risk. In 2009, Suntec avoided resorting to a dilutive equity issue to refinance a chunky CMBS maturity. Looking ahead, Suntec could see gearing increase due to a fall in office asset values at the 4Q09 portfolio revaluation. With declining office income and book value risk, Suntec could decide to go the acquisition route in 2010. It is likely to keep aggregate portfolio gearing unchanged or lower, necessitating a combination of both equity and debt financing on any purchase. Assets could be acquired from the original vendors of the Suntec assets, which have (presumably) been de-levering the parent portfolio as seen with the recent Fortune REIT [NOT RATED] transaction and the sale of both the Suntec City Convention Centre and Suntec City’s property manager. Asset yields are unknown -creating potential dilution risk.

Relative value and retail attraction. Suntec has appreciated over 9% since our October upgrade. Current price-to-book of 0.65x compares favorably to the 0.73x averaged in 2006, though the 11% value gap is partially offset by the revaluation risk in 4Q09. We see relative value versus CapitaCommercial Trust [HOLD, S$1.13], which is trading at 0.78x book and 5.4% FY10F yield. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT) but note that CCT’s property valuations are more recent.

We note that Suntec’s strong retail portfolio, which should benefit from the revitalization of the Marina Bay area and the full opening of the new Circle Line, is consistently undervalued. Retail income should also support distributions. We have changed our assumptions, including on the pace and extent of the recovery in office rents from FY12 onwards. Our SOTP value for Suntec increases from S$1.21 to S$1.43. Adjusting for fund-raising risks, we derive a fair value of S$1.40 (prev: S$1.21). Maintain BUY (15.6% total return).