Suntec – JP Morgan

3Q09 results: Better than expected on lower financing costs

• Suntec REIT announced 3Q09 results, with DPU at S$0.0292/unit, down 2% Q/Q but 8% higher than our estimate on the back of lower financing costs (2.88% all-in costs) as a result of a higher proportion of short-term debt. Distributions YTD amounted to S$0.0816/unit, giving a 9.9% annualized yield based on yesterday’s closing price. Book value stood at S$1.95/unit with gearing of 34%. Stock will trade ex-3Q09 distribution on 2 November.

• Occupancy rate has improved, but rents still under pressure: We note that the occupancy rate for the portfolio improved on a sequential basis, with that of Suntec City Office back up at 94.8% versus 92.5% in 2Q09. Renewal rents, however, continued to fall, declining 12% Q/Q to S$7.30 psf pm. Passing rents for the trust’s retail portfolio also saw a modest decline. We retain our view that substantial negative rental reversion will start to kick in only in 2H10 and distributions are likely to bottom out only in 2012.

• Calibrating our earnings estimates: We raise our distribution estimates for 2009-2011 by 2-7% to factor in lower financing costs, especially for this year. Our Jun-10 DDM-based price target remains unchanged at S$1.00/unit, assuming an 8.5% discount rate and a 2% long-term growth rate.

• We retain our Underweight rating on Suntec: Key upside risks to our rating and price target include: 1) a potential fundraising that is likely to remove the EFR overhang; 2) incrementally more positive news flow for the sector in the near term; and 3) a quicker-thanexpected bottoming out and recovery of the rental market. Key downside risks include a worse-than-expected rental reversion cycle and a return to illiquid capital markets as we had a year ago.