Suntec – Phillip

3QFY09 Results

Suntec REIT reported gross revenue for 3QFY09 of $61.9 million (flat y-o-y, -3.9% q-o-q)), net property income (NPI) was $47.0 million(+3.1% y-o-y, -3.6% qo-q). Distributable income was $47.7 million(+8.8% y-o-y, flat q-o-q). DPU for the quarter was 2.921 cents (+2.3% y-o-y, -1.9% q-o-q).

On a year-on-year basis, top-line revenue was little changed, however quarterly performance registered negative growth, indicating the still dismal operating environment.

Office portfolio reversionary rent continues on its downward slide. We estimate that It has fallen approximately 45.9% from the peak rental achieved in the 1st half of FY08. Although leases were secured at continually lower rents, occupancy rate of the office portfolio has shown encouraging sign of recovery. Office occupancy rate for 3QFY09 was up 1.6ppt at 96.4%. This could indicate optimism among tenants as they lock in the low rentals now. Similarly, the retail portfolio also showed improvement in occupancy. 3QFY09 occupancy rate improved 0.7ppt to 99.1%. The office portfolio accounts for 46% of total revenue while the retail portfolio contributes 54%.

Suntec has total debt of $1.88 billion and gearing of 34.3%. Next refinancing requirement is in 2011 with debt of $532.5 million.

Valuation & recommendation. We believe Suntec portfolio is showing sign of recovery as leasing activities resumed as indicated by Suntec improving occupancy. We upgrade our portfolio occupancy forecast for FY09F from 97.6% to 99.3%. We raise our gross revenue forecast by 4.3% from $233.1 million to $243.1 million. FY09F DPU correspondingly increased by 5.1% from 10.05 cents to 10.56 cents. We raised our DCF derived fair value from $0.94 to $1.13. Maintain Hold recommendation.