Suntec Reit

Suntec Reit: unveiled details for Suntec City’s asset enhancement initiative (AEI), which involves a $410m makeover of the mall and convention centre over 4 years, funded by debt.
Scheduled to start in mid-2012–15, the AEI comprises $230m capex for Suntec City Mall and $180m on Suntec Singapore. Suntec City Mall will be repositioned with specialty retail stores, enhanced F&B offerings (from 20% of NLA to 35%) and new anchor tenants, while L1/L2 of the convention centre will be converted to retail, increasing the retail space in Suntec City by 15% to ~1m sf (roughly the same size as the largest mall VivoCity). Low-yielding upper floors will be decanted to prime locations and connectivity will improve with the integration of new retail space in L1&2 of Suntec SG with Suntec City Mall.

Upon completion, mgt guides for Suntec City Mall’s NPI is expected to increase by 33%, implying 10.1% ROI and an 84% increase in capital value over capex (capitalized at 5.5%), based on the forecast 25% rise in avg rents from S$10.10psf to S$12.59psf as more prime space is created and the percentage of anchor/mini-anchors is reduced from 50% to 35%.

The AEI will be funded in stages, supported by sales proceeds from Chijmes and debt, with minimal requirements for Ph 1/2. Mgt intends to use part of the sale proceeds to mitigate the temporary drop in DPU in this period.

Nevertheless, Deutsche notes significant execution risks and potential downside to near-term DPUs. But maintains Hold with TP $1.21, as valuations are undemanding at 0.7x P/B with FY12E yield of 7.3%.
StanChart keeps at Underperform with TP $1.