Suntec – DB

3Q09 results ahead; improvement in occupancy rates

3Q09 DPU of 2.92cts (+2% YoY, -2% QoQ) came in ahead of our forecast with 9M09 DPU of 8.82cts making up 80% of our FY09E. Earnings were underpinned by organic growth from the Suntec City properties which made up 86% of total revenue.

Improvements in occupancy; retail relatively stable. While contracted office rents continued to trend down (leases secured in 3Q09 for Suntec City averaged S$7.30psf vs S$8.24psf in 2Q09 & avg passing rents of ~S $8psf), occupancy rate improved QoQ fr 94.8% to 96.4% for the office portfolio. Majority of the office leases maturing this yr have been renewed, with only 14,000sf (or 0.8%) left vs 527,000sf at the bgn of the yr. Mgmt has commenced work for leases exp.in FY10 with ~65,000sf or 14% of exp.space renewed.

Similar improvements in occupancy were seen for retail, with avg occupancy rates rising from 98.4% to 99.1% in 3Q. Avg rents for Suntec City Mall were relatively stable at S$10.96psf (S$10.98psf in 2Q). The proportion of retail leases exp. in FY09 has been reduced to 180,500sf (17.3% of total) with the lease with Carrefour (exp in Dec) constituting the bulk.

Balance sheet remains healthy with gearing at 34.3%, and financing cost is relatively low at 2.88%. With the refinancing of the S$700m CMBS completed, the next major refinancing due is the S$400m club loan due in June 2011.

Maintain Buy with TP of S$1.26 pegged to parity to DDM. While 4Q09E DPU is expected to be weaker on higher financing cost upon the drawdown of the S$825m club loan & issue of the deferred units, we believe Suntec is on track to meet our 11cts (flat YoY) FY09E DPU forecast. The office sector deterioration has been well reflected in our view, with the stock trading at 0.6 P/B and yielding 9.3% for FY09E implying a wide 667bps spread over the 10-yr bond.