Suntec – OCBC

Growth despite weaker operating trends

DPU above expectation. Suntec REIT reported 3QFY11 gross revenue of S$67.9m, up 7.4% YoY, due to consolidation of S$7.5m revenue from Suntec Singapore, as the group raised its stake to 60.8% from 20.0% in Aug. Excluding this, gross revenue would be 4.4% lower YoY due to negative rental reversions and lower occupancy rates at Suntec City. NPI, on the other hand, fell by 5.6% YoY on higher operating expenses and absence of property tax provision reversal versus 3QFY10. Nevertheless, distributable income increased by 21.9% YoY to S$56.4m. This was mainly due to the inclusion of MBFC Properties, though partially offset by lower contribution from ORQ. DPU for the quarter stood at 2.533 S cents, up 1.2% YoY and flat QoQ. Together with 1HFY11 DPU of 4.92 S cents, 9M DPU totaled 7.453 S cents. This is above both our and consensus forecasts, which represents 80.1% and 77.6% of our and consensus full-year figures, respectively.

Weaker operating trends. Office portfolio occupancy was weaker at 98.6%, as compared to 99.2% in 2Q. This was mainly dragged down by Suntec City office, which saw its occupancy eased from 99.5% in prior quarter to 98.0%. Leases secured for the quarter, we note, were also lower at an average rent of S$8.41 psf pm (S$9.28 in 2Q). As for its retail portfolio, occupancy also slid slightly from 97.7% in 2Q to 97.3%. More notably, committed average passing rents at Suntec City continued to fall, marking its sixth consecutive quarters of decline since Mar 2010 to S$10.10 psf pm (down c.7.3% over the period). As at 30 Sep, a balance of 12.7% of office and 31.7% of retail leases are due to expire in FY12.

No details on AEI yet. Management had previously mentioned that it may be looking at possible asset enhancement initiatives (AEIs) at Suntec City. However, it has yet to give details on this front. We note that the group’s

gearing ratio was at 39.9%, with an average all-in financing cost of 2.82% and weighted average term to expiry of 2.92 years. While there are no major refinancing requirements till 2013, we believe an AEI, especially a considerable one, may entail a drawdown of more debt. This is in addition to our cautious view that a fast deteriorating macro condition, if it happens, may depress rents and property capital values, hence resulting in higher-than-desirable gearing level. We are currently putting our Hold rating and S$1.59 fair value UNDER REVIEW due to a change in analyst coverage.