3QFY09 Results

Suntec REIT reported gross revenue for 3QFY09 of $61.9 million (flat y-o-y, -3.9% q-o-q)), net property income (NPI) was $47.0 million(+3.1% y-o-y, -3.6% qo-q). Distributable income was $47.7 million(+8.8% y-o-y, flat q-o-q). DPU for the quarter was 2.921 cents (+2.3% y-o-y, -1.9% q-o-q).

On a year-on-year basis, top-line revenue was little changed, however quarterly performance registered negative growth, indicating the still dismal operating environment.

Office portfolio reversionary rent continues on its downward slide. We estimate that It has fallen approximately 45.9% from the peak rental achieved in the 1st half of FY08. Although leases were secured at continually lower rents, occupancy rate of the office portfolio has shown encouraging sign of recovery. Office occupancy rate for 3QFY09 was up 1.6ppt at 96.4%. This could indicate optimism among tenants as they lock in the low rentals now. Similarly, the retail portfolio also showed improvement in occupancy. 3QFY09 occupancy rate improved 0.7ppt to 99.1%. The office portfolio accounts for 46% of total revenue while the retail portfolio contributes 54%.

Suntec has total debt of $1.88 billion and gearing of 34.3%. Next refinancing requirement is in 2011 with debt of $532.5 million.

Valuation & recommendation. We believe Suntec portfolio is showing sign of recovery as leasing activities resumed as indicated by Suntec improving occupancy. We upgrade our portfolio occupancy forecast for FY09F from 97.6% to 99.3%. We raise our gross revenue forecast by 4.3% from $233.1 million to $243.1 million. FY09F DPU correspondingly increased by 5.1% from 10.05 cents to 10.56 cents. We raised our DCF derived fair value from $0.94 to $1.13. Maintain Hold recommendation.

Holding steady

• Maintain Outperform; target price raised to S$1.43 (from S$1.37). 3Q09 results were in line with Street and our expectations. We remain positive that the opening of the Marina Bay Integrated Resort and new train stations in 2010 will provide catalysts for Suntec’s retail sector.

• In line. 3Q09 DPU of 2.92cts was in line with consensus and our expectations as declining interest base rates mitigated a weaker topline caused by lower occupancy in the office segment. Additionally, lower interest expenses for One Raffles Quay (also due to declining interest base rates) resulted in higher dividend contributions to Suntec REIT’s distributable profit. YTD distributable income of S$141.8m (+15% yoy) and DPU of 8.8cts (+8% yoy) form 81% of our full-year forecasts. We expect 4Q09 topline to dip as this quarter’s lower passing rents kick in and higher interest rates are applied to new loan refinancing that would be drawn down. 3Q09 net property income of S$47m (+3% yoy) was boosted by tighter control of propertyrelated expenses.

• Occupancy up qoq. Office occupancy was 96.4%, up 1.6% pts from 94.8% as at Jun 09. This was mainly due to higher occupancy at Suntec Offices of 94.8% (from 92.5% in Jun 09) as returned space in 2Q09 was gradually filled up. Leases secured for the quarter averaged S$7.30psf (-11% qoq). Including One Raffles Quay, there was only 0.8% of total net lettable area left for renewal in FY09. Retail occupancy averaged 99.1% (+0.7% qoq), while retail rents secured for Suntec City (the main retail component) remained flat qoq at S$10.96psf.

• Opening of Marina Bay IR and train stations could boost retail. We believe the opening of the Marina Bay Integrated Resort by 1Q10 and two new train stations (Esplanade and Promenade Circle Line stations) by 2H10 are wild cards that could boost Suntec’s retail segment. We make no changes to our DPU estimates, but roll our target price one year forward. Our DDM-derived target price rises accordingly to S$1.43 from S$1.37 (discount rate of 8.8%). Maintain Outperform on expectations of retail catalysts.

Upgrading on relative value

DPU declines QoQ. Suntec REIT (Suntec) posted S$61.9m in 3Q09 gross revenue, up 0.8% YoY but down 4% QoQ. Net property income (NPI) of S$47m rose 3.1% YoY and fell 3.6% QoQ. Suntec will distribute 2.921 S cents per unit, up 2.3% YoY but down 1.9% QoQ. This is the first quarterly decline in distributions after 18 straight quarters of DPU growth since listing. While both revenue and NPI missed the mark, 3Q DPU was 5% higher than our estimate because of lower-than-expected interest costs.

Suntec Office occupancy up. In 2Q09, two tenants re-delivered part of previously-leased space at Suntec City Office Towers (SCOT), driving occupancy down to 92.5% as of June-end. Occupancy has now improved to 94.8% as of September-end. Average achieved rents of S$7.30 per square foot per month are down 11.4% QoQ and 41.9% YoY. We believe we have approached an inflection point where the margin of safety between passing rents on expiring leases and spot rents reverses. The manager said 22.2% of total office NLA (including One Raffles Quay) will expire in 2010.

Playing the long game. Recently 1) Suntec has acquired an interest in Suntec City Convention Centre for S$25m; and 2) the REIT manager has acquired the property manager for Suntec City. In both cases, the seller was Suntec City Development (SCD) Pte Ltd, the original seller of the Suntec City asset at IPO. SCD is slowly reducing its direct exposure to the Suntec City development but affiliated parties own stakes in both the REIT and the REIT manager. From the perspective of Suntec and its manager, these transactions are small but have strategic significance in tightening control over the Suntec City development. This also corresponds with past behavior – Suntec has been amassing strata space at SCOT.

Relative value. Our revised earnings estimates now reflect actual 9M09 figures and incorporate contributions from the Convention purchase. We see relative value versus CapitaCommercial Trust [CCT, HOLD, FV: S$1.13]. Suntec is trading at a 185-basis point discount to CCT based on our FY10F estimates. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT). Income is also supported by Suntec’s retail portfolio vis-à-vis CCT. We also believe negative office rent reversions are priced in, and the key bone of contention now is how the sub-sector recovers. Suntec is well-positioned to benefit from the revitalization of Marina Bay. Upgrade to BUY with revised fair value of S$1.21 from S$1.00 previously (10.3% total return).