Suntec – OCBC

Valuations are not compelling

Results are in line. Suntec REIT reported 2Q07 revenue of S$46.6m; +8% YoY and +2% QoQ. Distributable income was equally strong at S$28.0m; +19% YoY and +4% QoQ. At the DPU level, growth was more moderate at +9% YoY and +4% QoQ to 1.965 cents. Growth was mainly due to the increase in office revenue at Suntec City and Park Mall offices as well as the newly acquired strata space from Suntec City and good cost control. While property expenses rose 2%, this was much lower than the rate of increase in revenue and this explains the stronger bottom-line performance. Cost to income ratio fell from 26% (2Q06) to 24% in 2Q07. The results are in line with our estimates.

Outlook remains positive. Suntec continues to benefit from the buoyant office/retail market. Over the period, its office portfolio achieved an occupancy rate of 99.2% (Suntec at 99.3% and Park Mall at 98.1%). Going forward, a substantial portion of its space is coming up for renewal and this should boost organic growth over the next 2 years.

Reinstatement of acquisition fees to manager. In Aug 2005, Suntec’s manager ARA Trust Management (ARA) waived its acquisition fees entitlement to show its commitment to the long term interest of unitholders. In Feb 2007, ARA announced that it will be reinstating the 1% fees for new acquisitions. In terms of impact to unitholders, we see this additional cost as marginal and should not have any meaningful effect on the accretion assessment of any new purchases. Since Dec 06, Suntec has bought about 30,172 sf of strata space at Suntec Office Towers at an average cost of $1,349 psf or a total of S$40.7m. We do not see any funding issue, as Suntec’s earlier placement raised about S$177m. We estimate over 1.0 m sf of strata space not owned by Suntec, but it is difficult to assess whether Suntec will be able to acquire the remaining space as ownership is very fragmented.

Maintain HOLD. Suntec is trading close to our fair value of S$1.82 (based on asset size of S$4.5bn versus current asset size of S$3.9bn) and with its trading yield at about 4% and with no acquisition pipeline, the investment case for Suntec is not compelling. We thus maintain our HOLD rating on Suntec.