Suntec – CIMB

Starting out right

• DPU in line; maintain Outperform. 1Q10 results met our expectations but were broadly above Street estimates. DPU of 2.51cts forms 26% of our full-year estimate and 28% of the Street’s. Although DPU fell yoy due to poorer occupancy rates and rents, quarterly performance held up well, with offices surprising with moderate occupancy and rental improvements where we had anticipated a fall. With limited office leases due for renewal in the rest of FY10, as well as greater bargaining power in retail rental negotiations with the opening of the Esplanade Circle Line and Marina Bay integrated resort in April, we believe Suntec REIT will be on track to meet our full-year expectations. Our estimates and DDM-based target price of S$1.59 (discount rate 8.1%) are intact. Suntec REIT still trades below book value (0.7x vs. sector average of 1.0x)) while it offers prospective yields of 7%, in line with the sector average. We see stock catalysts from upside for retail rents.

• Weaker yoy performance from fall in occupancy. Distributable income of S$45.4m fell 2.1% yoy mainly due to lower occupancy for the office and retail segments. DPU fell by a steeper 13.9% yoy from an increase in units as deferred payments in units to the original vendors of Suntec Development are paid out every June and December.

• Better office performance over 4Q09 heartening. Qoq, occupancy at Suntec City surprised us, with office occupancy improving to 95.5% (+0.2% pt) while retail occupancy dipped to 96.4% (-1.2% pts), where we had anticipated the opposite. Management explained the fall in retail occupancy as temporary frictional vacancy. Portfolio office leases secured in the quarter improved moderately by 3% to S$7.34 psf while portfolio retail rents improved marginally by 1%.

• Limited office leases due for renewal in FY10. For the rest of FY10, there is less than 100,000sf of office space left for renewal due to successful forward renewals of half of the space due for expiry. There is more retail space for renewal (185,269sf) in the same period. We believe increased traffic in the Marina Bay area with the opening of the Esplanade Circle Line and Marina Bay integrated resort will enhance Suntec management’s bargaining power in retail lease negotiations.