Suntec – DMG
Positive rental reversion; BUY
Stable 3Q09 earnings; earnings in-line. Suntec REIT reported 3Q09 results DPU of 2.92¢ (+2.3% YoY; -1.9% QoQ). Annualised 9M09 DPU (including deferred units) came in at 10.9¢, broadly in-line with ours and consensus estimates. Net property income rose 3.1% YoY on the back of higher rental reversion. Suntec will trade ex-3Q09 distribution on 02 November 2009.
Maintain BUY, DDM-based TP of S$1.45. Achieved positive rental reversion and higher occupancy. Suntec achieved gross office revenue of S$28.7m for 3Q09, 7.9% higher than in 3Q08, driven mainly by higher rents achieved for the Suntec City and Park Mall offices. In 3Q09, committed occupancy for the overall retail portfolio stood at 99.1% (98.4% in 2Q) and 96.4% for office (94.8% in 2Q).
Healthy leasing activity. For 9M09, Suntec renewed and signed 513,000 sqft of office space. With this, the remaining office leases expiring in FY09 amounts to approximately 14,000 sq ft or 0.5% of the total office NLA. Suntec has seen healthy leasing activity, with eBay/PayPal taking a 28,000 sqft lease in Tower 5 (UBS’s former space). COSL Drilling, Interoil Singapore (oil & gas), Asia Green Capital (investment bank), Dan Bunkering (bunker trader) are among the new tenants at Suntec City.
Retail reprieve on overall earnings. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords. Nevertheless, with retail contributing to ~50% of overall income, we expect earnings prospects to remain favourable. We believe the spectre of higher retail footfall at Suntec City is likely to transpire when the Circle Line becomes fully operational in 2011. The opening of Esplanade and Promenade stations will materially enhance Suntec’s traffic footfall, a case that is currently seen in ION Orchard mall, given its connectivity with Orchard MRT. At current prices, Suntec offers investors an attractive dividend yield of 8.0% for FY10. Stock traded at 4.6% yield between 2005 and 2007. At our TP of S$1.45, stock still offers attractive yield of 6.5%.