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Suntec REIT: MBFC.

Wednesday, October 27, 2010

Suntec REIT is purchasing the one-third interest in Marina Bay Financial Centre (MBFC) held by Choicewide Group Limited, Cavell Limited and Hutchison Whampoa Properties Limited for S$1,495.8 million. This is hot on the heels of the announcement by K-REIT that it would purchase Keppel Land's one third interest in the same project. See slides here.

"The Manager is currently reviewing various financing options for the Acquisition to determine an optimal capital structure for the Acquisition. Details for the financing structure will be set out in the circular to be issued to Unitholders in due course, together with a notice of an extraordinary general meeting of Unitholders, for the purpose of seeking the approval of Unitholders for the Acquisition" and "The Acquisition is expected to improve the earnings and distributions for Unitholders". Read press release here

As per Suntec REIT's latest report, its current gearing is at 32.9%.  Total assets at S$5.275 billion.  Debt at S$1.733 billion. The REIT currently has 1,881,862,143 units in issue. See Financial Results for 3Q2010 here.

The net property income (NPI) of Suntec REIT is about S$200 million, annualised. NPI yield is 3.8%.  So, the acquisition at S$1,495.8m should at least have an annualised NPI of about S$60m (for a NPI yield of 4%) to make it NPI yield accretive.

Details as to the NPI of the acquisition has not been made available. However, it was made known that the acquisition will increase Suntec REIT’s office portfolio nett lettable area (NLA) from approximately 1.9 million sq ft to approximately 2.4 million sq ft. Using K-REIT's one third share of the same project as a guide which gives a NPI of S$37.396 million and if we include the income support of S$113.9 million payable over 60 months to be provided by the Vendor, giving us S$ 22.8m per year, we would get S$60.196m per year. So, the purchase looks to be NPI accretive.

It would be interesting to see what kind of financing structure would be decided upon. It is my assumption that Suntec REIT would issue rights to fund the purchase instead of having a share placement exercise if it is sincere about improving the distributions for unitholders. It could also gear up to 45% (on existing properties, excluding the proposed acquisition) and get about $600 million in loans which would reduce the size of any accompanying rights issue. Perhaps, in such an instance, they would have a 1 for 2 rights issue at about $1.00 per rights which would obtain an additional $909 million in funds. It could also gear up on the proposed acquisition (a 40% gearing would secure another $600 million in loans). This would further reduce the size of any accompanying rights issue.

Of course, this is all guesswork on my part. It is very late and I am half asleep. Let's wait for the circular.


Derek said...

Hi AK,

A reader of mine was asking

"Suntec pays unitholders abt 10c div per annum. Based on current price I tot yield shd be abt 6.5%. Pls advise how you derive yield of 3.8%. Tks."

I will be directing him directly to your site. Hope to hear from you.

AK71 said...

Hi Derek,

Thanks for the question. The answer lies in which "yield" we are talking about.

The yield which your reader was referring to is the "distribution yield". That is a function of the REIT's DPU and the prevailing unit price.

"NPI yield" is a function of Net Property Income (NPI) and Asset Value.

When a REIT acquires new properties, they should be NPI yield accretive (i.e. income accretive). Hence, the choice to use NPI yield in the analysis.

Now, it does not naturally follow that if an acquisition is NPI yield accretive that it would be distribution yield accretive too (even if the unit price remains unchanged). Much would depend on the financing method employed to carry out the acquisition.

I hope this answers your reader's question. :)

Anonymous said...

As mentioned in the prospectus, only new Private shares will be issued for this acquisition. Little will benefit current uniholders. Not surprising that the HK-owners only protecting their own private interest. Look at PCCW case... after delisting share holders are left in the lurch!

AK71 said...

Hi Anonymous,

I have a blog post regarding this situation. You could read it here:

Suntec REIT: OCBC retains BUY call.

I do not have a problem with the private placement if the issue price of the new units are at a small discount to the last traded price.

My calculations also showed that existing unitholders will still benefit as the expected DPU will still be higher, post acquisition. Of course, I would have preferred a rights issue.

Could you leave your name or initials in future comments? Thanks. :)

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