Suntec – OCBC
Upgrading on relative value
DPU declines QoQ. Suntec REIT (Suntec) posted S$61.9m in 3Q09 gross revenue, up 0.8% YoY but down 4% QoQ. Net property income (NPI) of S$47m rose 3.1% YoY and fell 3.6% QoQ. Suntec will distribute 2.921 S cents per unit, up 2.3% YoY but down 1.9% QoQ. This is the first quarterly decline in distributions after 18 straight quarters of DPU growth since listing. While both revenue and NPI missed the mark, 3Q DPU was 5% higher than our estimate because of lower-than-expected interest costs.
Suntec Office occupancy up. In 2Q09, two tenants re-delivered part of previously-leased space at Suntec City Office Towers (SCOT), driving occupancy down to 92.5% as of June-end. Occupancy has now improved to 94.8% as of September-end. Average achieved rents of S$7.30 per square foot per month are down 11.4% QoQ and 41.9% YoY. We believe we have approached an inflection point where the margin of safety between passing rents on expiring leases and spot rents reverses. The manager said 22.2% of total office NLA (including One Raffles Quay) will expire in 2010.
Playing the long game. Recently 1) Suntec has acquired an interest in Suntec City Convention Centre for S$25m; and 2) the REIT manager has acquired the property manager for Suntec City. In both cases, the seller was Suntec City Development (SCD) Pte Ltd, the original seller of the Suntec City asset at IPO. SCD is slowly reducing its direct exposure to the Suntec City development but affiliated parties own stakes in both the REIT and the REIT manager. From the perspective of Suntec and its manager, these transactions are small but have strategic significance in tightening control over the Suntec City development. This also corresponds with past behavior – Suntec has been amassing strata space at SCOT.
Relative value. Our revised earnings estimates now reflect actual 9M09 figures and incorporate contributions from the Convention purchase. We see relative value versus CapitaCommercial Trust [CCT, HOLD, FV: S$1.13]. Suntec is trading at a 185-basis point discount to CCT based on our FY10F estimates. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT). Income is also supported by Suntec’s retail portfolio vis-à-vis CCT. We also believe negative office rent reversions are priced in, and the key bone of contention now is how the sub-sector recovers. Suntec is well-positioned to benefit from the revitalization of Marina Bay. Upgrade to BUY with revised fair value of S$1.21 from S$1.00 previously (10.3% total return).