Suntec REIT (SUN) recently announced the successful conversion of BFC Development Pte. Ltd. (BFCD) ' a company which holds Marina Bay Financial Centre Towers 1 & 2 and the Marina Bay Link Mall, from a private limited company to a limited liability partnership with the name 'BFC Development LLP'. SUN currently holds one-third interest in the MBFC properties through its interest in one-third of the issued share capital of BFCD. Following the conversion, although SUN's interest will remain unchanged, going forward we expect the trust to save an estimated annualized tax of S$3.2-3.7m, as BFCD will no longer be subjected to corporate income tax. We expect this savings in taxes to contribute an additional 0.14S'' and 0.18S'' to FY12 and FY13 DPU respectively. Based on our DDM valuation (COE: 9.5%; TGR:1.5%) we maintain BUY on this counter with a revised TP of S$1.52. SUN is currently trading at 6.0% spread to 10-year bond yield which is 108bps and 366bps above its long term (5.0%) and pre-crisis mean spread (2.4%) respectively, our TP of S$1.52 translates to a spread of 5.1% and a potential upside of 13.8%.

Enjoy tax savings by converting to limited liability partnership. By converting to a limited liability partnership (LLP), unitholders of SUN will be able to enjoy tax transparency on the income it receives from the MBFC properties. This is consistent with the tax-free income from other properties held directly by most REITs in Singapore.

Possible conversion of ORQ into LLP in the future. Given the success of converting BFCD into a LLP, we believe SUN and its partners in One Raffles Quay (ORQ) will move forward to convert their holding company into another LLP. However, as the conversions of private limited companies into LLPs are subjected to the approval of IRAS on a case by case basis, we currently do not forecast this factor into our model. Additionally, even if the conversion is successful, we expect to see minimal impact on the earnings of FY12.

Source: OSK