• Operational income from MBFC Phase 1 becomes tax transparent. Upgrade K-Reit to BUY (TP S$1.21), maintain BUY for Suntec Reit (TP S$1.58).

·        Conversion for One Raffles Quay to this more tax-efficient structure possible in the longer term

·        Upgrade K-Reit to BUY (TP S$1.21), maintain BUY for Suntec Reit (TP S$1.58)

A more tax-efficient structure for MBFC Phase 1 in place. K-Reit and Suntec Reit had announced that they have successfully converted the vehicle which holds Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall Phase I (collectively known as MBFC Phase I), into a Limited Liability Partnership (BFCD LLP) structure. Under the previous structure, both K-Reit and Suntec Reit pay a17% corporate tax rate on the rental income generated on the property.  Upon conversion, the operational rental income (excluding income support) generated by MBFC Phase 1 will no longer be subjected to corporate taxes. The new structure will take effect from 16 June 2012 and is not retrospective.

FY13 DPU to increase by 3.6% - 5.1%. Based on our estimates, both Reits should reap tax savings of close to S$2.2 m and S$4.5m in FY12 and FY13 respectively. Netting off administration fees, we estimate that FY12 DPU should increase by 1-2% and FY13 DPU by about c4-5%. We think this conversion is a positive step as it would also pave the way for the possible restructuring of One Raffles Quay’s (ORQ) into a similar more tax efficient LLP structure in the longer term Currently, the payable tax for ORQ is estimated to be close to S$3m p.a.

TP rise by 7.9% – 8.6%, upgrade K-Reit to BUY. Adjusting for the tax savings, Suntec Reit’s TP is raised by 8.6% to S$1.58. We continue to like Suntec Reit for its strong balance sheet and we believe the tax savings should help to partially offset the income vacuum of Suntec City Phase 1 AEI works which began 2Q12. We have also upgraded K-Reit to BUY from HOLD. We like K-Reit’s for its quality assets and we believe the tax savings would help to strengthen its balance sheet. Net of the tax adjustment and factoring in a higher withholding tax for its Australian property, our new TP of S$1.21 (+7.9%) offers investors a total return of c.30%.  

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