STOCK APPEARS FAIRLY PRICED

•4QFY11 results above estimates

•Stepping up proactive leasing strategy

•Suntec City AEI to start in Jun

4QFY11 results exceeded expectations.

Suntec REIT reported 4QFY11 NPI of S$52.0m and distributable income of S$55.3m, up 10.1% and 23.1% YoY respectively. The decent results were achieved despite the negative rental reversions in its office portfolio, thanks to higher contribution from MBFC Properties and greater interest savings from prudent capital management. DPU was up by 7.0% YoY to 2.479 S cents, bringing the full-year DPU to 9.932 S cents, or a yield of 8.7%. The results were slightly ahead of market expectations, with FY11 DPU forming 106.6%/102.4% of our/consensus DPU forecasts.

Portfolio metrics remained stable pre Suntec City AEI.

Overall office and retail portfolios, we note, also registered marginal improvements in occupancy to 99.2% and 97.5%. Management said that it will be taking on a proactive approach towards its leasing strategy in view of the uncertain economic outlook. We understand that only approximately 10.0% of its office leases by NLA are due to expire in 2012, after management renewed more than 233,000 sq ft of the leases. As at 31 Dec, Suntec REIT’s aggregate leverage was at 39.1%. This is an improvement from its leverage of 41.8% seen in 3Q, helped mainly by a positive S$396.2m revaluation of its investment properties (NAV up by 10.1% YoY to S$1.99).

Maintain HOLD.

Management also provided little details on the asset enhancement initiatives (AEI) on Suntec City, but reiterates that it will minimize disruption when the works commence in Jun. We now factor in Suntec City AEI (consequent drop in occupancy and rental income) and the consolidation of Suntec Singapore into our FY12-13 forecasts. Using the DDM valuation model, our fair value now drops from S$1.59 to S$1.10, roughly in line with its three-year average P/B of 0.6x. As the stock appears fairly priced at current level, we maintain our HOLD rating on Suntec REIT.

Preparing for darker days

Management is renewing leases to mitigate risks. However, with job cuts only starting to surface and higher asset leverage, downside risks could outweigh upside potential.

4Q11/FY11 DPU is broadly in line with our forecast and consensus at 26%/102% of FY11. We fine-tune our DPU estimates but keep our DDM TP (disc rate 9.8%). We also introduce FY14 numbers. Maintain Underperform.

Too early to turn positive

While 4Q was decent, we remain negative on offices. Positives came from the leasing of more office space vacated by IDA at Suntec City (taking occupancy from 3Q’s 98% to 99%) and higher achieved rents for leases secured in the quarter (S$8.72 psf vs. 3Q’s S$8.41 psf) though we believe 3Q rentals could have been locked in for bigger space. With proactive lease renewals, office leases expiring in FY12 had dipped to 10% of its office NLA from 13% last quarter. However, given limited expiries at ORQ and MBFC, the bulk of renewals are likely to come from ‘older’ Suntec City offices, which we think could face more leasing difficulties in an office slowdown. With job cuts only starting to surface and upcoming supply, we think it’s too early to turn positive.

Suntec City Mall AEI

Suntec City Mall was stable ahead of AEI. Management has signed leases with a few tenants while in advanced negotiations with others. More colour will be provided in 1Q12 results. Management remains mum on expected disruptions but maintains that it will seek to minimise disruption.

Lower aggregate leverage

Aggregate leverage dipped to 39% from 42% the last quarter, on higher asset revaluation with 6-9% increases for key assets on 0-25bp cap-rate compressions and improved property performances. With this, asset valuations have returned to pre-crisis peaks, implying downside risks in a worse slowdown.

Executing AEI works

At a Glance

• Full year DPU was 7% above our forecast

• Half of office leases expiring this year have been renewed, likely see some positive rental reversion

• AEI at Suntec City commencing in June

• Maintain BUY and S$1.46 TP

Comment on Results

Slightly above expectations. 4Q11 gross revenue and NPI rose by 30.4% and 10.1% yoy to S$80m and S$52m respectively, largely due to the consolidation of revenue from Suntec Singapore. Additional contribution from Marina Bay Financial Centre (MBFC) Phase 1 also helped to lift distributable income by 23.1% to S$55.3m. DPU was 2.479Scts and full year DPU was 7% above our forecast. NAV rose by 10% as the trust took in a revaluation surplus of S$396m.

Office performance on track. The office space vacated by some of the tenants has been largely absorbed, hence pushing up overall portfolio office occupancy by 0.6ppt to 99.2%. On top of that, the trust has further renewed another 62,600 sf of FY12 office leases at an average of S$8.72 psf pm, a tad higher than last quarter’s S$8.41 psf. Hence, we expect to see some positive rental reversion given that some of these leases may have been signed in 2H 09 where monthly rents were S$7.1 –S$7.3 psf. The trust has only another 10.1% of leases in terms of NLA to renew in FY12.

AEI works at Suntec City will kick start in June. While we expect a further drop in occupancy from its current 97.5%, we believe that occupancy should not decline beyond 80% at any point in time as the works would be carried out in phases. Meanwhile, the trust has commenced the marketing of space ahead of CDL’s South Beach project, which is largely retail and hotel space.

Recommendation

Maintain BUY. Suntec offers FY12-13F DPU yields of 7.5%-7.6% and is trading at an undemanding at 0.6 x P/BV. Gearing has fallen from close to 40% a quarter ago to 38.5%. There is also minimum refinancing this year (7% of total debt). Our unchanged DCF-backed TP of S$1.46 offers a total return of 35%.

Suntec Reit Q4 DPU rises 7%, beating forecast

Full-year DPU up 0.7%; gross revenue jumps 30.4%

SUNTEC Real Estate Investment Trust (Suntec Reit) reported a distribution per unit (DPU) of 2.479 cents for the fourth quarter ended Dec 31, 2011, up 7 per cent year on year, and 19.9 per cent higher than its forecast.

This brings its DPU for 2011 to 9.932 cents, a 0.7 per cent increase from 2010 and beating forecast by 14.2 per cent.

Income available for distribution for the quarter exceeded its forecast by 20.7 per cent and stood at $55.3 million – a 23.1 per cent increase from the corresponding period a year ago.

For the year, Suntec Reit posted a record-high income available for distribution of $220.7 million, 20.9 per cent higher than 2010’s $182.5 million.

Said Yeo See Kiat, chief executive officer of ARA Trust Management (Suntec) Ltd, Suntec Reit’s manager: ‘I am happy to report that we have delivered a record high distribution income for FY 2011, despite the negative rental reversions in our office portfolio during the year. This was achieved on the back of strong performance from Marina Bay Financial Centre properties as well as prudent capital management that led to greater interest savings.’

Gross revenue for the quarter was $80 million, an increase of 30.4 per cent over Q4 2010, and 33.5 per cent higher than its forecast. This was mainly due to the consolidation of Suntec Singapore’s revenue following the acquisition of an additional 40.8 per cent effective interest in August 2011.

Excluding Suntec Singapore’s revenue contribution of $20 million, however, the gross revenue for Q4 2011 was $60.1 million – 2.1 per cent lower than the same period the year before, due to a decline in retail and office revenues.

Gross revenue for the year stood at $270.3 million, up 8.3 per cent from 2010’s $249.5 million.

Net property income for the quarter rose 10.1 per cent year on year to $52 million, while for the full year, this was up 0.2 per cent at $193.4 million.

As at Dec 31, 2011, the overall committed occupancy for Suntec Reit’s office and retail portfolio stood at 99.2 per cent and 97.5 per cent respectively.

Commenting on Suntec Reit’s office portfolio, Mr Yeo said: ‘In view of the current euro crisis and the uncertain economic outlook in 2012, we stepped up our proactive leasing strategy and forward renewed more than 233,000 sq ft of our leases due to expire in 2012.’

‘With a balance of approximately 10 per cent of our leases due to expire in 2012, we are well positioned to meet the challenges ahead,’ he added.

Looking ahead, Suntec Reit’s manager said that an estimated 1.3 million sq ft of office space is expected to enter the market this year – 50 per cent lower than the new supply in 2011.

‘However, overall Grade A rents and demand are expected to be muted in 2012, as companies remain conservative and hold off possible expansion plans or reconfigure offices to sub-let excess space,’ it added.

Suntec Reit units closed half a cent lower yesterday at $1.145.