Suntec – DMG

Improving office segment offset by weak retail

1Q11 res ults in-line with expectations. Suntec REIT (Suntec) reported 1Q11 DPU of 2.388S¢ (+3.1% QoQ; -5.0% YoY), which represents 25% of our FY11 estimate. Net property income fell 2.4% YoY (-1.2% QoQ) mainly due to lower rental income from retail space (Suntec City Mall and Chijmes). Meanwhile, dividend income from JV rose 123% YoY to S$6.5m (+94.3% QoQ) due to maiden full three-month income contributions from MBFC during 1Q11 following the completion of the acquisition of a 33% stake in MBFC in 9 Dec 2010. At its current price, Suntec is trading at 6.2% yield and 3.7% spread, which is higher than pre-crisis mean spread of 2.4%. Maintain BUY with unchanged TP of S$1.76, derived based on DDM (COE: 8.4%; TGR: 3.0%).

Retail rental growth remains sluggish due to new supply in city centre. In spite of strong retail sales and tourist arrivals, retail rental growth has been sluggish in the prime city centre due to 1) new supply of retail space injected during the last two years, and 2) negative retailer sentiments towards rising inflation and hence, higher operating costs. However, we expect the retail rental to remain stable in the quarters ahead, underpinned by visitors’ arrivals which are expected to stay strong. For 1Q11, retail revenue accounted for 53% of total gross revenue excluding the 33% interest in ORQ and MBFC.

Office leases buoyed by higher occupancy and average rent. During 1Q11, Suntec City office space saw an increase in occupancy rate to 99.5% (+0.4ppt QoQ, +4.0% YoY), significantly higher than core CBD occupancy rate of 94.1%. In addition, Suntec City office space saw a higher average rent for leases secured during 1Q11 at S$9.22 psf (+13% QoQ; +30% YoY). This is in line with the strong growth of Grade A office rents which averaged S$9.90 psf in 1Q11 (+10% QoQ; +22% YoY).