Suntec – OCBC

Yet another strong quarter

Strong quarter, once again. Suntec REIT (Suntec) reported S$42m in 3Q distributable income, up 40.2% YoY and 11.8% QoQ. The REIT performed well on a QoQ basis – it recorded S$59.2m in gross revenue from its portfolio ex-One Raffles Quay (ORQ), up 5.8% from 2Q. NPI margin, which increased from 76.1% in 2Q to 77.6%, should actually have dipped slightly if not for a much lower provision for property tax in 3Q. Suntec will pay out 2.793 S cents to investors, up 10.9% from last quarter’s 2.52 S cents payout. This works out to an annualized yield of about 7.3%.

Portfolio is doing well. Gross revenue from Suntec City (both office and mall) rose 6.4% QoQ to S$51.3m, despite a slight dip in occupancy levels. The Park Mall and Chijmes assets also saw QoQ increases in revenue. Meanwhile, with 100% occupancy and no near-term expiries, contribution from ORQ (in the form of income support from the vendor; interest income; and dividend income) was relatively flat QoQ. These leases are at rates severely below market rates and reversionary growth from ORQ should start gaining traction in FY11.

Rent reversions still the focal point. Reversionary growth continued to drive Suntec’s performance in 3Q as the trust digested lease renewals and replacements secured on about 14% of its total portfolio NLA over 2Q and 3Q. Rentals are continuing to show strength at both Suntec’s office and retail properties – management disclosed that a recent lease at Suntec City’s Office Towers was secured in June at around S$15 psf/month – a first for the REIT. Suntec City Mall also saw a new high with committed average passing rent crossing S$11 psf/month for the first time.

We expect more reversionary growth. We believe near-term growth will be driven by rent reversions – about 46% of Suntec’s office portfolio ex- ORQ is up for renewal over 4Q08 and FY09. Current rentals being secured by the REIT are between S$12 and S$15 psf per month – we expect office rentals to peak by year end and hold – and even if rents slide back a little, there is still plenty of upside potential for its properties earning less than S$6 psf/month. The weak appetite for S-REITs has gifted investors with a great yield opportunity – we continue to like Suntec for its assets, its consistently strong performance, and its high distribution yield. We reiterate our BUY rating and S$1.71 fair value estimate.