Suntec REIT’s 2Q09 results exceeded both the Street and our expectations on a stronger topline, better net property income margins, and lower interest expense. Distributable income of S$47.7m (+14% yoy) and DPU of 2.98cts (+7% yoy) form 32% of our full-year forecasts. 1H09 DPU of 5.9cts also exceeded expectations at 64% of our full-year forecast. Office occupancy declined 2.6% pts to 94.8% while retail occupancy was stable at 98.4%. In view of the strong 1H, we have moderated our rental decline assumptions and assumed higher net property income margins. Our DPU forecasts for FY09-11 rise by 8-20%. Our target price rises accordingly to S$1.28 from S$1.07 (discount rate 9.4%), still based on DDM valuation. Maintain Outperform.

No surprises

• Results in line
• Office rents still tracking downwards but at slower pace
• Buy with TP of $1.18

2Q09 DPU at 2.98cts. Suntec reported a set of in line results with revenue rising 9% yoy to $64.5m but marginally down qoq. NPI remained relatively flat qoq at $48.8m while distributable income came in 2.8% higher to $47.7m. Annualised yield works out to be 11.2%. No revaluation was done for the quarter.

Office – more of the same. As expected, average office renewal rents dipped to $8.24psf/mth vs $9.90psf/mth in Q1 but still resulted in positive rental reversions. Office portfolio occupancy dipped to 95% in Q2 and is expected to stabilize at this level for the rest of this year. The retail component remained relatively flat. Looking ahead, office rents is expected to continue to dip, but at a smaller pace. Current asking rents is still at about $8psf.mth. The group has a remaining 4.5% of NLA to be renewed in FY09 and another 26% in FY10. To improve connectivity from the upcoming opening of the Circle Line station at Suntec Mall, some minor enhancement works are planned over the next few months but capex should remain small.

Maintain Buy. Suntec’s valuations are undemanding at FY09 and FY10 DPU yield of 10.1% and 8.3% and P/bk NAV of 0.53x. Suntec’s balance sheet is healthy at 33.9% gearing and no refinancing needs till 2011. Maintain Buy with revised TP of $1.18.

Suntec Reit DPU up 6.6% as office revenue rises

SUNTEC Reit’s distribution income for the second quarter rose 13.5 per cent to $47.7 million from $42 million a year back. Distribution per unit was 2.977 cents, 6.6 per cent up year-on-year.

Gross revenue for the three months ended June 30 rose 8.9 per cent to $64.5 million, from $59.2 million for the same period last year.

This was mainly due to higher office revenues achieved during the quarter, said ARA Trust Management, Suntec Reit’s manager. Gross office revenue rose 20 per cent year-on-year in Q2, driven by higher rents achieved for the Suntec City and Park Mall properties, as well as additional revenue from Suntec City office strata space acquired last year.

The overall committed occupancy rate for Suntec Reit’s office portfolio was 94.8 per cent as at June 30.

For its retail portfolio, gross revenue rose a marginal 0.5 per cent over the year-ago quarter. Suntec City Mall contributed $28 million, while Park Mall and Chijmes contributed $6.2 million.

The overall occupancy rate for the Reit’s retail portfolio was 98.4 per cent as at June 30.

Property operating expenses rose 18.5 per cent in the quarter to $15.7 million, due to a higher property tax expense as there had been a write-back of property tax provision in Q2 FY2008.

Net financing cost for the quarter was $18.8 million, versus a credit of $9.9 million for Q2 last year. This was due to a net loss arising from the re-measurement of interest rate swap transactions and convertible bonds. Excluding the re-measurement, net financing cost for the quarter fell to $8.5 million.

Suntec Reit’s gearing ratio stood at 33.9 per cent as at June 30.

In April, Suntec Reit secured an $825 million loan facility, with which the office and retail trust said it has no further refinancing needs until 2011.

These second quarter results bring the Reit’s half year gross revenue to $129.4 million, 12.4 per cent up year-on-year, and its distributable income to $94 million, 18.1 per cent up from the first half of last year. DPU for the first six months rose 11 per cent year-on-year to 5.895 cents.

Suntec Reit yesterday closed one cent up at $1.06 a unit.

Outperforms again but faces headwinds to further DPU growth

Beats expectations, yet again. Suntec REIT reported 2Q distributable income of S$47.7m, up 2.9% QoQ. Gross revenue ex-One Raffles Quay slipped 0.6% QoQ. The results exceeded our expectations with outperformance both on the revenue and interest expense (average all-in cost of 2.8% in 2Q) fronts. Suntec will pay out 2.977 S cents for the quarter, up 2% QoQ. The manager proclaimed that it has delivered 18 straight quarters of DPU growth right since listing.

Occupancy falls at Suntec Office. Occupancy at Suntec City Office Towers fell from 96.3% as of March-end to 92.5% as of June-end as two tenants redelivered part of previously-leased space. Average achieved rents of S$8.24 per square foot per month are 45% below the peak S$15 psf pm guidance given for rents renewed a year ago. The manager did not care to express a view on rents beyond 2009 saying that the “crystal ball is murky”. We tend to concur here – there are still a lot of unknowns about the shape and path of the overall economic recovery and how this flows down to the demand side of the office equation. If the market continues to be sickly, Suntec’s ‘under-rented’ cushion will diminish as leases fixed close to the peak of the cycle expire.

Retail portfolio shows resiliency. Suntec’s retail portfolio was more stable with 98.1% of Suntec City Mall occupied versus 98.6% three months ago. We note average passing rents slipped QoQ at Suntec City and Chijmes, but performed better than expected. Suntec is gearing up for the Circle Line opening next year and revealed plans to improve connectivity and create retail units linking the mall to Promenade MRT station. Expected capex spend is minimal. We have bumped up our estimates for Suntec’s retail portfolio through adjustments on vacancy and rent decline assumptions as well as cap rates used.

Headwinds to future DPU growth. We continue to like the positioning and potential for Suntec’s assets. We estimate that the current unit price implies a S$1200-1250 psf value for Suntec City. We see headwinds to future DPU growth however, especially stemming from the office assets. Secondary challenges to DPU stability include increased interest expense on refinanced funds and the enlarged unit base as deferred units kick in biannually. We have adjusted our earnings estimates to reflect our revised retail expectations and also to incorporate 1H results. 2H09F distributable income constitutes 45.5% of our full-year estimate. Our revised fair value estimate is S$1.00. Maintain HOLD.

Great connectivity, value not fully appreciated

2Q09 results above expectations. Suntec reported a 6.6% YoY increase (+2% QoQ) in 2Q09 DPU to 2.98¢. Annualised DPU came in at 11.9¢, 20% above our and consensus estimates. Revenue was up 8.9% YoY underpinned by higher rents achieved for Suntec City and Park Mall properties. Suntec will trade ex-2Q09 distribution on 3 Aug 2009. Price target raised to S$1.24 (S$0.80 previously) to reflect a lower of cost-of-equity assumption of 9.6% and a higher terminal growth rate of 3% (nil previously).

Less than 5% of total office NLA left for renewal for FY09. For 1H09, Suntec renewed and signed 375,000 sqft of office space. With this, the remaining office leases expiring in FY09 amounts to approximately 84,000 sq ft or 4.5% of the total office NLA. Office occupancy fell to 94.8% from 97.4% following the return of spaces by UBS and IDA.

Still under-rented but positive rental reversion unlikely to transpire. Passing rents for Suntec City office average about S$6/sqft, marginally below spot transactions of between S$6-7/sqft. Management acknowledged that it is clearly still a tenants’ market and the focus on tenant retention remains paramount. In our view, management will likely shift their focus to occupancy optimisation at the expense of rental rates, capping the likelihood of positive rental reversion in the coming quarters.

Retail reprieve on overall earnings. With retail contributing to 53% of overall income, we expect earnings prospects to remain favourable compared to CCT. We believe the spectre of higher retail footfall at Suntec City is likely to transpire when the Circle Line becomes fully operational in 2010. The opening of Esplanade and Promenade stations will materially enhance Suntec’s traffic footfall, a case that is currently seen in ION Orchard mall, given its connectivity with Orchard MRT. The stock is still undervalued as current share levels appear to still price-in recapitalisation expectations, a case that is unlikely to transpire, in our view. At current prices, Suntec offers investors an attractive dividend yield of 8.2% for FY10. Stock still undervalued at current levels. Trade stock to S$1.24 (~7.1% yield).