Higher office revenue boosted distribution

• Results exceeded expectations; maintain Outperform. FY09 DPU exceeded Street and our expectations (107% of our estimate) mainly due to lower-thanexpected  interest expense. As office occupancy strengthened above 95%, we believe management would not be under pressure to cut rents drastically in FY10. We retain our FY10-11 estimates and introduce FY12 estimates. Our DDM-based target price of S$1.59 is intact (discount rate 8.1%). Maintain Outperform as we believe the opening of Circle Line MRT stations next to the Suntec development will boost its retail performance in 2010.

• Full-year DPU of 11.7cts (CIMB-GK 10.9.cts) grew 6% yoy vs. distributable income growth of 13% yoy to S$189.6m. DPU’s weaker growth was due to deferred units paid out to the original vendors of Suntec City. Net property income of S$182.1m was up 5.6% yoy, mainly thanks to higher office rents achieved for Suntec City and Park Mall, including additional revenue from the Suntec City office strata space acquired in 2008. Leases secured in 4Q09 averaged S$7.11 psf, in line with market expectations for Grade A offices.

• Occupancy and rental reversions positive. Office occupancy as at Dec 09 was 96.8%, down 1.9% pts yoy. However, occupancy had improved steadily from its trough of 94.8% in 2Q09. Retail occupancy as at Dec 09 was 98.1%, down 1% pt yoy. With vacancy at less than 5% for both office and retail space, we believe the manager would not be under pressure to cut rents significantly in FY10.

• Assets written down by 3%. Suntec’s portfolio was revalued at S$5.2bn (including One Raffles Quay) as at Dec 09. This was a write-down of S$151m or 3.2% of its portfolio value mainly for ORQ. Valuers applied cap rates of 4.5-4.75% for office valuations, and 5.6-5.75% for retail valuations. Portfolio-wise, Suntec’s offices were valued at S$1,733 psf, and retail space at S$1,833 psf. One Raffles Quay was valued at S$2,100 psf.

Treading in line

At a Glance
• 4Q DPU of 2.88 Scts in line with expectations
• DPU +5% on higher occupancy and rental assumptions, lower interest costs
• Maintain BUY, TP S$1.47

Comment on Results
4Q09 DPU of 2.88 Scts in line. Revenues of S$61.8m (-2.7%,flat qoq) was largely due to lower retail revenue in 4Q09. Net property income of S$47.2m (-1.4%,flat qoq) declined by a smaller extent
due to lower property tax expenses. Distributable income of S$47.8m (+8% yoy, 0% qoq) translated to a DPU of 2.88 Scts. Portfolio was revalued down by 3% to S$150m leading to gearing to inch up to 33%.

Office outlook remains weak. While Suntec’s office portfolio occupancy strengthened slightly to 95.3%, average renewal rents continued to dip, albeit at a slower pace. As at 4Q09, leases were secured at a rate of S$7.11 psf pm (-37% yoy, -2.6% qoq) and are expected to continue to weaken in 2010 due to the increasingly competitive office leasing environment. In FY10F, Suntec will be renewing c0.37m sqft of office space, representing c20% of its total office portfolio NLA.

Retail revenues are growing steadily. We expect retail revenues to grow steadily, with the buzz generated at the Marina Bay area post the completion of Marina Bay Sands (MBS) and completion of 2 MRT stations nearby. Its portfolio is mostly targeted at the mid-end consumer market and will complement the higher end retail option in MBS. In addition, enhancement works at Suntec City will help lift its retail revenues slightly when completed.

Recommendation
Maintain BUY, TP S$1.47. We adjust our office/retail rental and occupancy assumptions (+3 to 5%) on improved outlook and lower interest costs (-20bps) assumptions. Maintain BUY, TP S$1.47 based
on DCF, which reflects a prospective yield of 6.7-6.9%.

Full Year 2009 Results

• Full year revenue of $253.1 million, net property income of $192.2 million, distributable income of $189.6 million.
• 4Q09 DPU of 2.887 cents, bringing full year DPU to 11.703 cents.
• Total asset value of $5.2 billion.
• Maintain hold recommendation with fair value of $1.21

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Results within expectations
Suntec REIT recorded full year revenue of $253.1 million (+5.4% y-y), net property income of $192.2 million (+5.5% y-y) and distributable income of $189.6 million (+13.1% y-y). Full year DPU was 11.703 cents (+6.2% y-y). Suntec REIT full year results came in better than our projections (revenue +4.1%, net property income +2.3%, distributable income +7.3%, DPU +10.8%). The increase in revenue is backed mainly from higher office rental achieved in 2009. For FY2009, office portfolio accounted for 47% of gross revenue while the retail portfolio accounted for 53% of gross revenue.

We continue to see weakness in asset valuation. In the property valuations as at 31 Dec 2009, Suntec City recorded 3.8% decrease in value, while Park Mall and Chijmes held steady valuations. One Raffles Quay also recorded 11.7% devaluation. Including Suntec convention centre, which was acquired in September 2009, Suntec REIT has total asset value of $5.2 billion.

Quarterly results review
The office portfolio continues to see weakness in reversionary rent. New leases were contracted in 4Q09 at an average rate of $7.11 psf per month, which was the lowest in the 2-year periods from 1Q08 to 4Q09. However we could observe that the rate of decline has slowed. We believed the drop in rental could also be attributed to management trying to strike a balance in maintaining the office occupancy rate. Office occupancy has increased from 94.8% in 2Q09 to 96.8% in 4Q09. On the other hand, retail occupancy has dropped slightly from 99.1% in 3Q09 to 98.1% in 4Q09. Suntec REIT has managed to achieve relatively high portfolio occupancy amidst the recession and we think management has done a good job in maintaining this.

Capital management
Suntec REIT has total debt of $1,752 million and gearing (debt/assets) of 33.3%. It has no near term refinancing concern. The next loan maturity is in 2011 with loan amount of $632.5 million.

Forecasts
We retain our gross revenue forecasts and made slight changes to our DPU forecast. We forecast FY2010E revenue to decrease 5% before registering growth in FY2011E. Our DPU forecast for FY2010E is 8.49 cents, translating to a yield of 6.4%. Suntec REIT will be issuing the remaining of the 69 million deferred units this year. We believe average office rent may be bottoming for Suntec REIT, however we think spot office rent may be sticky for a while and do not expect a quick pick-up. We utilized a lower WACC assumption in our  DCF valuation and raised our fair value from $1.14 to $1.21. We maintain our hold recommendation.

Earnings within expectations; BUY

Stable 4Q09 earnings; earnings in-line. Suntec REIT reported 4Q09 results DPU of 2.89¢ (+1.0% YoY; -1.2% QoQ). FY09 DPU (including deferred units) came in at 10.9¢, broadly in-line with ours and consensus estimates. Net property income fell 1.4% YoY on the back of lower retail rental income. Suntec will trade ex-4Q09 distribution on 29 January. Maintain BUY, DDM-based TP of S$1.56 (S$1.45 previously), implying 6.5% yield at fair value.

Suntec retail occupancy slipped marginally. Suntec REIT’s portfolio office occupancy improved 0.4ppt QoQ to 96.8%. Both Park Mall and One Raffles Quay remains 100% occupied while Suntec City office registered a 0.5ppt QoQ improvement in occupancy to 95.3%. In contrast, Suntec’s retail occupancy saw a slight occupancy decline of 1ppt to 98.1%, due largely to the 1.4ppt decrease in Suntec City mall’s occupancy, which now stands at 97.6%.

Gearing at healthy 33% despite asset writedown. Suntec REIT undertook an asset devaluation of S$274m (or 5%) in Dec 09, bringing its portfolio AUM to S$5.1b, inline with our expectation. Its recent cash call of S$153m was used to repay debt facilities, hence capping its gearing to 33.3%, inline with large cap peers such as CMT, CCT and A-REIT, which boasts gearings of between 30-33%. We do not foresee further cash calls in the near term in view that asset values are likely to remain intact in 2010.

Tenant retention remains key focus in 2010. The focus on tenant retention remains paramount for Suntec REIT, in view that the bulk of leasing activity currently involves replacement demand, i.e. tenants moving from older office blocks to newer ones. Suntec REIT currently offers up to 2-months rent free to ensure that its effective rates are competitive vis-à-vis new office landlords. We believe Suntec REIT will likely register negative rental reversion in 2010 in view that the pace of systemic leasing activity is unlikely to match up with the colossal supply of ~2.7m sqft of un-leased office space that will be injected into the system this year. We adjust our FY10 DPU estimate from 9.3¢ to 10.1¢ to account for lower interest cost and raise our TP to S$1.56 (from S$1.45). At our TP, stock still offers attractive yield of 6.5%, above its heyday yields of 4.6%.

Suntec Reit’s Q4 DPU edges up

This brings 2009 DPU up 6.2% to 11.703 cents

SUNTEC Real Estate Investment Trust (Reit) reported a distribution per unit (DPU) of 2.886 cents, for its fourth quarter ended Dec 31, 2009, one per cent higher year-on-year.

This brings its DPU for 2009 to 11.703 cents, a 6.2 per cent increase.

Its distribution income for the quarter stood at $47.83 million, up 8.4 per cent from $44.1 million for the same period a year ago. For the year, Suntec Reit posted a distribution income of $189.6 million compared to $167.7 million for 2008.

‘I am happy to report that, amidst the serious challenges in 2009, we managed to record a strong growth of 13.1 per cent in our distribution income for the financial year ended December 31 2009,’ said Yeo See Kiat, chief executive officer of ARA Trust Management (Suntec) Limited, the manager of Suntec Reit.

‘Furthermore, we managed to secure a club loan of $825 million . . . in early 2009 to address all our refinancing needs in FY09.’

Gross revenue for the quarter, however, slipped 2.7 per cent to $61.8 million, mainly due to lower retail revenue.

Suntec Reit’s gross office revenue saw a marginal increase of 0.3 per cent to $28.8 million for the quarter because of marginally higher rents from Park Mall.

For the year ended Dec 31, gross revenue rose 5.4 per cent to $253.1 million.

For Suntec Reit’s office and retail portfolio, the overall committed occupancy stood at 96.8 per cent and 98.1 per cent respectively as at Dec 31, 2009.

Net property income also dipped 1.4 per cent to $47.2 million for the quarter, but rose 5.6 per cent to $192.2 million for the year.

Net financing costs incurred for the quarter was $18.9 million, an increase of 37.3 per cent over Q4 FY2008, mainly attributed to the net loss of $5.9 million from the re-measurement of interest rate swap transactions and convertible bonds, which has no impact on distributable income.

Excluding the re-measurement, the net financing cost for Q4 FY2009 was about $13.1 million.

For the quarter, the overall all-in financing cost averaged 3.47 per cent and the gearing ratio stood at 33.3 per cent as at end-2009.

The counter closed one cent lower at $1.33 in trading yesterday.