Suntec – DBS

Still trending up

Story: Suntec Reit reported a Q3 bottomline growth of 40% yoy and 9% qoq to $42m on a 27% improvement in topline to $59.2m. The better showing was due to higher operating performance, lower expense ratio of 22.5% and inclusion of associate income from ORQ. Q3 DPU came in at 2.793cts, translating to an annualized yield of 7.3%.

Point: Rental reversions from Suntec Office remained strong. The group renewed about 89,000sf of NLA during the quarter at between $12-15psf, higher than the $11.50-13.50psf transacted in 2Q. This helped lift average portfolio office rents to $6.30psf/mth. Looking forward, we believe the pace of office rental growth should decelerate given the softer economic outlook and increasing supply. Nevertheless, with another 644,789sf (45.8%) of NLA to be renewed in 4QFY08 and FY09, Suntec is well placed to benefit from the wide spreads between the passing and new office rents. The retail component also did well with average rents at Suntec Mall surpassing $11psf/mth, or c15% over previous levels. Plans for Park Mall asset enhancement activities are likely to be announced by end FY08. This is likely to provide further
upside surprise to earnings when completed. Refinancing concerns have abated as the group recently completed a $400m debt refinancing due Oct 08, through a club loan. Beyond this, it has a further $125m (MTN programme) due in FY09 and $700m (CMBS issue) maturing in FY10.

Relevance: We have tweaked our FY08 and FY09 DPU to 9.0cts and 10.2cts to adjust for the better than expected office rentals. The stock is offering 5.9% and 6.7% FY08/09 yields. Maintain Buy with a DCF-backed price target of $1.75, reflecting a higher risk free rate
assumption of 3.9% and lower terminal growth of 0.5%.