Suntec REIT - BT

Published in BT on July 30, 2005

Suntec Reit's proposed $1b acquisitions may not fly
Doubts reinforced by Temasek chief's earlier comments

(SINGAPORE) Market watchers are wondering if Suntec Real Estate Investment Trust's recent deals to buy $788 million worth of assets from City Developments will proceed in its current form in view of Temasek Holdings chief executive Ho Ching's caution to investors about some hazards in the Reit market.

Suntec's proposed acquisition announced a month ago involves deferred payment of nearly 10 per cent of the purchase price through the issue of units in Suntec Reit.

In her speech on Thursday night, Ms Ho warned investors to be wary about such deferred payments, without naming any particular Reit that might be using such financing structures. Analysts told BT that by deferring the issue of units for part of the payment for an asset acquisition, the idea is to reduce dilution and hence achieve an increase in the Reit's distribution per unit.

Suntec's $788 million acquisition of 11 properties from CityDev as well as the $230 million purchase of Wing Tai's Park Mall - both announced at the same time last month - need to be approved by the Reit's unitholders. But even before that, the circular for the unitholders' extraordinary general meeting, where their approval will be sought, has to be approved by the Singapore Exchange and Monetary Authority of Singapore, seasoned Reit players told BT. The deal in its current form might not make the cut even at that stage, some sources suggest.

Another interesting point analysts note in Suntec Reit's Q3 results announcement this week is that it has revalued its existing assets, namely the Suntec City complex, upwards by about 5 per cent or $107.4 million. Reits usually revalue their assets only at the end of their financial year. Because gearing limits for Reit are pegged to the value of their property portfolio, raising the value of the existing Suntec City complex's value would allow Suntec Reit to borrow more, which would facilitate further acquisitions.

Analysts believe that without the Suntec City revaluation and the deferred payment component of the CityDev deal, the $1.018 billion acquisitions from CityDev and Wing Tai would not be yield accretive to Suntec Reit.

The trust has not revealed the property yield on the assets it is buying from CityDev and Wing Tai but some analysts estimate it is slightly under 4 per cent. After deferred payment and gearing, that could be raised to a level that may be accretive to unit holders of Suntec Reit, which is currently trading on the stock market at a distribution yield of about 5.1 per cent. In her speech, Ms Ho referred to deferred issue of units in Reits in an asset purchase as 'charades' which 'shore up short-term performance indicators at the expense of longer-term pain'. She said: 'If for whatever reason, rental rates cannot improve or asset enhancements fail to raise operating income, such deferred financial burdens could become very painful for the unit holders.'

Some analysts say Suntec Reit may still be able to salvage the deal. Its contract with CityDev allows a cash payment instead of deferred payment for the 10 per cent of the purchase price, provided that the authorities allow the gearing cap for Reits to be raised from 35 per cent now to at least 50 per cent.

The MAS is currently reviewing Reit guidelines. Last month, it issued a consultation paper that sought feedback on a host of matters relating to Reits including whether the borrowing limit for Reits should be raised to 60 per cent, provided the Reit obtains and discloses a credit rating from a major rating agency.

By having a higher gearing component and hence a proportionately smaller equity component, the return on equity to a Reit's unit holders goes up. But that may be seen as yet another form of financial engineering.

Already, even before Ms Ho's speech was delivered on Thursday evening, there had been murmurs in the market that some of Suntec Reit's institutional shareholders were not delighted with the trust's proposed acquisition from CityDev. 'Firstly, it is not yield accretive looking at the upfront property yield, and secondly they don't see much growth in the assets,' a source told BT.

The properties that Suntec Reit is buying include the City House and Fuji Xerox Tower office buildings; Plaza by the Park along Bras Basah Road; and remaining strata units at Fortune Centre in Middle Road and Golden Mile Complex at Beach Road.

Industry observers also say Suntec could go back to CityDev to renegotiate downwards the price of the acquisition to a level where it becomes yield-accretive for the Reit's unit holders, or alternatively purchase only those properties in the package which would be yield accretive.

Up to 10 pm last night, Suntec Reit's top officials could not be contacted.

My Comments - With BT's continued focus (3 articles in one week) on Suntec, we can no longer ignore the power of the press plus the words of the world's 30th most influential woman combined. I hope I'm wrong, but be prepared for downside price pressure on Suntec on Monday (1-Aug) and possibly CDL and Wing Tai.

I'll likely reduce my Suntec stake further if it's still not too late. Price may be well supported due to recent bullish recommendations by several analysts and Monday being the last day of cd (cum dividend). But, if it drops to below $1.15, I'll take the risk to do some accumulation. I'll watch the mkt reaction closely and make decisions on the fly :D

It may even affect all Property and Bank stocks which had gone up quite a lot recently. In the worst case scenario, the whole stock market, as it's due for consolidation anyway. If that happens, we all know who to blame :D

What can save the situation now is for Suntec to come out to rebut the news reports and especially to clarify on the yield of the acquisitions. Another unlikely possibility is for Temasek's Head to clarify that her comments had been blown out of proportion by the press :D

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Disclaimer : The above is just my opinion. Do not rely on it for your investment decisions