Suntec – DMG

Earnings within expectations; BUY

Stable 4Q09 earnings; earnings in-line. Suntec REIT reported 4Q09 results DPU of 2.89¢ (+1.0% YoY; -1.2% QoQ). FY09 DPU (including deferred units) came in at 10.9¢, broadly in-line with ours and consensus estimates. Net property income fell 1.4% YoY on the back of lower retail rental income. Suntec will trade ex-4Q09 distribution on 29 January. Maintain BUY, DDM-based TP of S$1.56 (S$1.45 previously), implying 6.5% yield at fair value.

Suntec retail occupancy slipped marginally. Suntec REIT’s portfolio office occupancy improved 0.4ppt QoQ to 96.8%. Both Park Mall and One Raffles Quay remains 100% occupied while Suntec City office registered a 0.5ppt QoQ improvement in occupancy to 95.3%. In contrast, Suntec’s retail occupancy saw a slight occupancy decline of 1ppt to 98.1%, due largely to the 1.4ppt decrease in Suntec City mall’s occupancy, which now stands at 97.6%.

Gearing at healthy 33% despite asset writedown. Suntec REIT undertook an asset devaluation of S$274m (or 5%) in Dec 09, bringing its portfolio AUM to S$5.1b, inline with our expectation. Its recent cash call of S$153m was used to repay debt facilities, hence capping its gearing to 33.3%, inline with large cap peers such as CMT, CCT and A-REIT, which boasts gearings of between 30-33%. We do not foresee further cash calls in the near term in view that asset values are likely to remain intact in 2010.

Tenant retention remains key focus in 2010. The focus on tenant retention remains paramount for Suntec REIT, in view that the bulk of leasing activity currently involves replacement demand, i.e. tenants moving from older office blocks to newer ones. Suntec REIT currently offers up to 2-months rent free to ensure that its effective rates are competitive vis-à-vis new office landlords. We believe Suntec REIT will likely register negative rental reversion in 2010 in view that the pace of systemic leasing activity is unlikely to match up with the colossal supply of ~2.7m sqft of un-leased office space that will be injected into the system this year. We adjust our FY10 DPU estimate from 9.3¢ to 10.1¢ to account for lower interest cost and raise our TP to S$1.56 (from S$1.45). At our TP, stock still offers attractive yield of 6.5%, above its heyday yields of 4.6%.