Suntec, which invests in office and retail properties, in late September announced its intention to buy the office units of towers one, two and three in Suntec City that it doesnÆt already own. The Reit manager said on Thursday that it has received a positive response from numerous parties willing to sell and has secured commitments for S$35.5 million worth of units, comprising 26,400 square feet.
Should it end up buying all the remaining units, the aggregated consideration would be about S$173.2 million ($111 million).
The units secured so far will be yield accretive as they will generate a property yield of 5%, which is greater than Suntec ReitÆs existing blended property yield of 4.0%, the manager says. Taken together with the robust market for office property in Singapore at the moment and a solid performance by the trust management since the initial public offering in November 2004, investors were keen to participate in the placement.
Helping to ensure a good response, the deal was launched on the same day Singapore-listed Suntec posted its fourth quarter earnings. The report showed that net profit, thanks to earlier acquisitions of Park Mall and Chijmes, outdid the initial projections for fiscal 2006 made in the listing prospectus by 23%.
When the books closed early Friday morning last week (October 27), the offer was over two times covered with more than 50 investors having bought in. About 80% of the demand came from Asia û primarily Hong Kong and Singapore - and from large buyers of Reits from Australia. The remainder was generated out of Europe and the US.
ôThere was a lot of long-only and real estate funds buying on the fundamentals of the stock,ö a source familiar with the deal says. Aside from the new acquisition, Suntec is also in for organic growth as the average rent at its properties is expected to increase.
The demand was in line with the continuing strong interest in Asian property stocks in general. Another sign of this was Shenzhen InvestmentÆs $112 million placement on Thursday, which was several times covered at the top end of the offered range and attracted about 80 investors. The investment arm of the Shenzhen city government is in the process of re-focusing its business on real estate and infrastructure while divesting non-core businesses like power and IT.
The Suntec deal, which was arranged by Citigroup, comprised 120 million new units which were offered at a price between S$1.48 and S$1.52, or a 1.9% to 4.5% discount to the previous dayÆs close. It was priced at the mid-point of that range at S$1.50 for a 3.23% discount.
The sale accounted for 9.2% of the outstanding capital, or close to the maximum 10% that the manager under the trust deed can issue without seeking the approval of all unit holders.
ARA Trust Management (Suntec) Limited says it believes the placement will give the Reit greater flexibility in funding its acquisition programme both by raising cash directly and by increasing its debt capacity. It expects to deploy the full amount raised through the placement in the coming quarters.
Suntec posted a S$24.8 million ($15.9 million) net profit in the July-September quarter which rounds off its 2006 fiscal year and says it will pay a divided on S$0.0191 per unit û the highest quarterly distribution since the IPO.
ôSuntec Reit has ended its financial year 2006 on a high note with a total return of almost 60% since IPO. I am delighted that we were able to exceed our IPO forecast in each and every quarter,ö says Yeo See Kiat, CEO of ARA Suntec, in a written statement.
Such performance has contributed to pushing the unit price 55% higher since listing to ThursdayÆs close of S$1.55. When trading resumed Monday after a one-day suspension to complete the placement, the unit price dropped 3.2% to S$1.51, taking it close to the deal price.
In a research note issued yesterday, Deutsche Bank downgraded Suntec to ôholdö from ôbuyö, arguing that valuations are no longer compelling at current unit prices. It added that the placement creates uncertainty over deployment and may be near-term dilutive to dividend per unit growth. At the same time though, the investment bank raised its earnings forecast and increased its target price to S$1.55 from S$1.42, AFX reported.
Suntec is trading at a 2007 dividend yield of 5.2%, which compares favourably with K-Reit, which trades at 3.9%, and CapitaCommercial Trust at 4%. Those two are also made up of commercial properties and are its closest comparables among the Singapore-listed Reits.
Meanwhile, Hong Kong-listed Shenzhen Investment sold 300 million new shares, or 12% of the company, through a top-up placement which was increased from an initial offer of 220 million shares. The shares, also brought to market by Citigroup, were priced at HK$2.91, or close to the top end of the HK$2.77 to HK$2.93 range.
The final price equalled a discount of 5.5% to ThursdayÆs (October 26) closing price of HK$3.08, which was off from WednesdayÆs 52-week closing high of HK$3.24. The stock was suspended from trading Friday and the Hong Kong market was closed Monday for a holiday.
According to one observer, investors are expecting more upside with the new corporate strategy, especially as the management has already proven itself with the recent acquisition of shares and convertible bonds in Coastal Greenland, a Chinese property developer and investor listed in Hong Kong.
The $84 million purchase will give Shenzhen Investment a 22.8% stake in Coastal Greenland which has operations in several Mainland cities, including Beijing and Shanghai.