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Note: I am vested in Suntec REIT.

Business Times - 27 Oct 2010

MBFC whets Reit appetite again


Move by Suntec Reit comes in wake of foray by K-Reit Asia

By EMILYN YAP

(SINGAPORE) Suntec Real Estate Investment Trust is buying a one-third interest in some properties in Phase One of Marina Bay Financial Centre (MBFC) for $1.4958 billion or $2,568 per sq ft of net lettable area.

The sellers are Cheung Kong Holdings and Hutchison Whampoa, flagship companies of Hong Kong billionaire Li Ka-shing. Suntec Reit's manager is part of ARA Asset Management which is in turn, linked to Cheung Kong.

The deal - anticipated by some industry players - comes just weeks after K-Reit Asia said it would buy a stake in MBFC Phase One from its parent Keppel Land.

Suntec Reit will be holding an extraordinary general meeting to obtain unit holders' nod for the acquisition. If it wins approval, it will be getting a stake in two Grade A office towers, Marina Bay Link Mall and 695 carpark lots.

MBFC Phase One was jointly developed by Keppel Land, Hongkong Land and Cheung Kong/Hutchison Whampoa.

The $1.4958 billion which Suntec Reit is paying for the Cheung Kong/Hutchison Whampoa stake includes an income support of $113.9 million.

Suntec Reit is forking out slightly less than what valuers thought the MBFC stake (including the income support) was worth as at Sept 30 - CB Richard Ellis valued it at $1.496 billion and Knight Frank at $1.497 billion.

Excluding the net present value of the income support, the price would have worked out to $1.3977 billion or $2,400 psf.

Suntec Reit yesterday shared a few details about how it would fund the acquisition and how the deal could affect its earnings.

It said that it is reviewing various financing options, which include the issuance of units or debt securities. It also expects the acquisition 'to improve the earnings and distributions for unit holders'.

According to Yeo See Kiat, CEO of Suntec Reit's manager, the purchase will further diversify Suntec Reit's income stream and increase its presence in the Marina Bay area.

'The high quality attributes of the MBFC property would offer a good long-term growth potential,' he added.

Unit holders can expect more information when Suntec Reit releases a circular on the deal. This should happen in the next few weeks.

Suntec Reit counts Park Mall, Chijmes, a one-third stake in One Raffles Quay (ORQ) and properties in Suntec City as part of its portfolio. The net lettable area from office space is around 1.9 million sq ft. This could increase to around 2.4 million sq ft after the acquisition.

Some market watchers have been expecting Suntec Reit to purchase the MBFC stake from Cheung Kong/Hutchison Whampoa, after K-Reit said it would buy Keppel Land's stake for $1.4268 billion or $2,450 psf (which includes a $29 million rental support).

Without the income support, the price of the MBFC stake in that deal works out to $2,400 psf.

These observers were guided by what happened in July 2007 - both Reits had announced on the same day that they would each buy a one-third stake in ORQ.

ORQ was also jointly developed by Cheung Kong, Keppel Land and Hongkong Land. Suntec Reit bought its share from Cheung Kong; K-Reit received its stake from Keppel Land.

Now that Suntec Reit has declared its intention to buy the MBFC stake, analysts will be shifting their focus on working out the financial impact of the acquisition.

With details lacking, it is hard to assess the impact of the deal now, said CIMB analyst Janice Ding. But looking at Suntec Reit's annualised distribution yield of 6.6 per cent for the third quarter ended Sept 30, she concluded that it might not be easy for the deal 'to be immediately accretive on the distribution per unit level'.

Suntec Reit gained two cents yesterday to close at $1.56.

yay! more income for ARA! Smile
Will be interested to see how they are going to finance the purchase.

I think we can predict how Suntec REIT will finance the latest set of acquisition with some degree of accuracy (though not entirely).

Investment Properties: $5.227 billion (as of 3Q 2010)
Total Debt: $1.733 billion

Lets assume that Suntec is willing to gear up to 40% of its asset valuation to fund its acquisitions.

New Investment Valuation: $6.72 billion (includes the latest acquisition)
Total Debt: $2.7 billion (based on 40% LTV)

This means that Suntec should be able to raise $1 billion worth of new loans to fund its acquisitions.

There are 3 ways for any company to grow - 1) Equity, 2) Debt and 3) Retained Earnings. In the case of a REIT, due to its extremely high payout ratio, it lacks any sort of retained earnings. And since it has exhausted its gearing limit of 40% (an assumption), it needs to turn to equity fund raising to finance the remaining $0.5 billion. This is approx 1/6 of Suntec REIT's market capitalization. It may choose to raise more equity in order to fuel future acquisition.

(Not Vested)
Disclaimer: This is guess-work and it represents my own predictions. Not a call to buy or sell.


I have received Suntec REIT's circular on the proposed financing arrangement. It will be as follows:-

1) Private Placement of new units to raise S$428.2 million (unit price to be determined)

2) Term loan of S$1.105 billion from a consortium of banks, including DBS, Citibank and Standard Chartered.

EGM will be held on November 26, 2010 (Friday) at 10 a.m. to vote on the proposed acquisition.

Property yield will improve from 3.99% to 4.00%, not exactly mind-blowing. Gearing will hit about 41%, but will be reduced once the shareholder's loan is paid off, to below 40%.

Proposed DPU will increase just slightly from 8.611 cents/share to 8.699 cents/share.
Business Times - 30 Nov 2010

Suntec Reit raises $418m from private placement


By EMILYN YAP

SUNTEC Real Estate Investment Trust (Suntec Reit) has raised net proceeds of $417.9 million from a private placement of new units, to partially fund its $1.5 billion purchase of properties at Marina Bay Financial Centre (MBFC).

It will be issuing 313 million new units at $1.37 apiece, following an accelerated book-building process yesterday.

The private placement attracted institutional investors and was oversubscribed by 3.1 times.

The issue price came in at the upper end of the $1.34 to $1.38 range which Suntec Reit indicated earlier in the day. At $1.37, it carried a discount of 4.2 per cent to the Reit's closing price of $1.43 last Friday.

Trading in the new units is expected to start on Dec 9. They amount to around 17 per cent of the 1.801 billion units in issue as at April 15.

Gross proceeds from the placement came up to $428.8 million. The Reit will use $417.9 million to part finance its acquisition, and it will have to borrow another $1.1 billion for the purchase.

The remaining $10.9 million from the gross proceeds will cover fees and expenses incurred for the private placement. Citigroup Global Markets Singapore, DBS Bank and Standard Chartered Securities (Singapore) were joint financial advisers, underwriters and bookrunners for the exercise.

Suntec Reit first announced in October that it will buy a one-third stake in two office towers, Marina Bay Link Mall and 695 carpark lots in Phase One of MBFC from Cheung Kong Holdings and Hutchison Whampoa.

In a circular, it projected that the consolidated net property income yield for the MBFC interest would be 4 per cent for the financial year ending Dec 31, 2011. This would exceed the forecast net property income yield of 3.9 per cent for the existing portfolio.

Unitholders approved the acquisition at an extraordinary general meeting last week.

In conjunction with the private placement, Suntec Reit will give out an advanced distribution to existing unitholders. It estimates that the distribution per unit could come up to around 1.677 cents, and it will announce the actual amount later.

The Reit asked to halt trading in its units yesterday morning. Trading in the counter will resume today.

The proposed acquisition of a one-third stake in two office towers, Marina Bay Link Mall and 695 carpark lots in Phase One of MBFC from Cheung Kong Holdings and Hutchison Whampoa will cost Suntec Reit $1.5b and is a IPT.

This acquisition is projected to bring a nett yield of only 4% in FY2011, vs. only 3.9% for the existing property portfolio.

To fund the acquisition and the $10.9m worth of related professional expenses to enable it, Suntec Reit will issue 313m new units (a 17% increase over the existing base) @$1.37 on 9Dec10 to raise $428.8m in new equity, plus taking on $1.1b worth of new debts - i.e. at a high (likely maximum) gearing of 73.3% LOA ratio.

All these have been carefully designed and carfted by Suntec Reit's own financial engineers (and double-checked by external financial engineers!) to provide and maintain a yearly yield (based on 4 regular quarterly DPS's) on the enlarged base of approx. 2,114m Suntec Reit units at the current approx. 7% p.a.

Understandably, Mr Market has rightly marked down the Suntec Reit's price by some 7% in the last 2 weeks. And perhaps to counter this, Suntec Reit's manager has announced an Advanced Distribution of $1.677/unit on the existing units.....
http://info.sgx.com/webcoranncatth.nsf/V...penelement

I simply don't like such IPTs and such highly engineered financial investments!
(30-11-2010, 08:11 AM)dydx Wrote: [ -> ]The proposed acquisition of a one-third stake in two office towers, Marina Bay Link Mall and 695 carpark lots in Phase One of MBFC from Cheung Kong Holdings and Hutchison Whampoa will cost Suntec Reit $1.5b and is a IPT.

This acquisition is projected to bring a nett yield of only 4% in FY2011, vs. only 3.9% for the existing property portfolio.

To fund the acquisition and the $10.9m worth of related professional expenses to enable it, Suntec Reit will issue 313m new units (a 17% increase over the existing base) @$1.37 on 9Dec10 to raise $428.8m in new equity, plus taking on $1.1b worth of new debts - i.e. at a high (likely maximum) gearing of 73.3% LOA ratio.

All these have been carefully designed and carfted by Suntec Reit's own financial engineers (and double-checked by external financial engineers!) to provide and maintain a yearly yield (based on 4 regular quarterly DPS's) on the enlarged base of approx. 2,114m Suntec Reit units at the current approx. 7% p.a.

Understandably, Mr Market has rightly marked down the Suntec Reit's price by some 7% in the last 2 weeks. And perhaps to counter this, Suntec Reit's manager has announced an Advanced Distribution of $1.677/unit on the existing units.....
http://info.sgx.com/webcoranncatth.nsf/V...penelement

I simply don't like such IPTs and such highly engineered financial investments!

Haha I was waiting for you to comment on this transaction. Tongue Thanks for your thoughts!

Incidentally, I was there at the EGM as a shareholder, and witnessed some not-very-pleasant exchanges between some disgruntled shareholders and Management (Yeo See Kiat). Basically it was an impasse - Management implied that if you do not like the deal structure, you are free to vote AGAINST it on your voting slip. In essence, the EGM was "for show" and it was already a done deal before the voting began (IMHO).

You should have seen the rows and rows of professionals involved in this deal. It's extremely lucrative for all parties involved, and not just ARA and the REIT Managers. Shook Lin & Bok and Alen and Gladhill were there (lawyers), KPMG and Deloitte and Touche (Financial Advisors cum "Engineers" haha) as well as representatives from banks such as DBS. Methinks they occupied nearly two whole rows and were all dressed impeccably.

Since I am just a very minor shareholder (with my stake in Suntec REIT forming less than 1% of my portfolio), I chose to remain silent and just watched the proceedings; but in my mind I was also thinking about the "improvement" in yield (3.9% versus 4%), the dilution involved (with the issuance of so many new shares) and the deal structure (which would involve a consortium of banks). One shareholder did go up to the microphone to remark - is Suntec REIT feeding the banks, or enriching shareholders? To which Management up on the podium gave a nervous laugh and cast sidelong glances at one another..... Big Grin

The crux of the issue here, of course, is that such REITs have the power and backing to perform such financial engineering and the hapless shareholder with a small stake is literally at their mercy. The EGM was very well-planned and organized (everyone each got a meal voucher which could be exchanged for a Bento Box Set), and there was almost an entire entourage of professionals waiting to help out lost shareholders. One can only imagine the cost of organizing such an EGM, and whether such costs could have been reduced in order to save $ for the REIT.

A S$5 Commemorative EZ-Link card with "Suntec REIT" emblazoned on it was also distributed to each unit-holder. I immediately did the logical thing - I went to the nearest MRT station (City Hall) and exchanged my EZ Link card for a fresh S$5 note.....call it an early dividend if you will. Smile
REITS have been discussed in depth in this board by d.o.g. and others. This dog-eat-shareholders type of arrangement is nothing new. I personally stay away from REITS these days as valuations are sky high and so are the riskiness of these instruments. The structure almost guarantees that there will be some form of "shafting" to normal unit holders - either from the managers or "sponsors" or both, in good times and in bad.
(30-11-2010, 11:46 AM)thefarside Wrote: [ -> ]REITS have been discussed in depth in this board by d.o.g. and others. This dog-eat-shareholders type of arrangement is nothing new. I personally stay away from REITS these days as valuations are sky high and so are the riskiness of these instruments. The structure almost guarantees that there will be some form of "shafting" to normal unit holders - either from the managers or "sponsors" or both, in good times and in bad.

Well said! It seems everyone seems to be getting interested in REITS now, when in actual fact this should be precisely the time when one should avoid the sector (due to over-exposure, over-pricing and possibly over-hyping)? Tongue
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