Suntec REIT: 2Q10 results in line; occupancy up but rents down

By Meenal Kumar
Fri, 23 Jul 2010, 08:26:09 SGT

Suntec REIT’s 2Q10 DPU of 2.528 S cents per unit (-15.1% YoY, +0.6% QoQ) was just 0.3% shy of our 2.54 S cents estimate. Occupancy at Suntec City Office (SO) and Retail (SR) was up compared to Mar 2010, but SO saw a QoQ decline in achieved rents and SR registered a QoQ decline in average passing rents (in both cases, due to chunky leases being renewed over 2Q). Achieved rents at SO are likely to stabilize at, or around, current levels (in our opinion) but that still leaves the office portfolio exposed to negative rent reversions, potentially impacting distributable income in FY10-11. Suntec is up 10.8% since our last report on 14 Jun and has achieved our SOTP-derived S$1.44 fair value estimate (unchanged, equivalent to 0.82x book). We are fairly comfortable with our estimates and assumptions as they are, and we downgrade Suntec to HOLD on valuation grounds. Potential catalysts for an upgrade could be the announcement of major AEI plans or potential acquisitions including Marina Bay Financial Centre Phase 1.

2Q results in line. Suntec REIT posted S$62.4m in 2Q10 gross revenue, down 3.3% YoY and 0.1% QoQ, due to lower revenue from both office and retail assets. Distributable income of S$45.9m for the quarter fell 3.7% YoY but edged up 1.2% QoQ. The results were in line with our expectations with revenue and distributable income within 2% of our estimates. Suntec will pay out 2.528 S cents per unit, up 0.6% QoQ but down 15.1% YoY due to an enlarged unit base (roughly 1.84b units versus 1.63b units a year ago). The payout was just 0.3% shy of our 2.54 S cents estimate.

Occupancy ticks up but rents down. Suntec City Office’s (SO) occupancy of 96.6% – is up 110 basis points versus Mar 2010 and 410 bps versus Jun 09. Suntec secured achieved rents of S$7.13 per square foot per month at SO, down 13.5% YoY and also down 2.9% QoQ (after a 3.2% QoQ increase in 1Q10). The QoQ decline, according to the manager, is as Suntec renewed or replaced some chunky leases (>10,000 square feet) during the quarter; however we understand it is able to achieve “mid-to-high sevens” on leases for smaller spaces. In 1H10, Suntec renewed or replaced more than 370,000 sf of office space, with just 3.6% of net lettable area left to renew for 2H10. The manager is now working on addressing the 20.6% of office NLA expiring in FY11; some tenants are likely to vacate to newer developments, in our view. Still, achieved rents are likely to stabilize at, or around, current levels (in our opinion) considering the pick-up in leasing activity, and the portfolio’s fairly high occupancy. That still leaves the portfolio exposed to negative rent reversions, potentially impacting distributable income in FY10-11. Occupancy at Suntec City Retail (SR), meanwhile, increased 190 bps versus three months ago but average passing rent declined 1.7% QoQ to S$10.70 psf pm (again, due to chunky leases).

Looks fairly valued. We have incorporated actual 1H results in our earnings estimates, along with some other minor adjustments. Suntec is up 10.8% since our last report on 14 Jun and has achieved our SOTP-derived S$1.44 fair value estimate (unchanged, equivalent to 0.82x book). We are fairly comfortable with our estimates and assumptions as they are, and we downgrade Suntec to HOLD on valuation grounds. Potential catalysts for an upgrade could be the announcement of major AEI plans or potential acquisitions including Marina Bay Financial Centre Phase 1.

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