Office Reits : A long-term savings plan

·    Operational income from MBFC Phase 1 becomes tax transparent Under LLP
  structure

·    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%.