2Q09 net property income of S$12.3m was S$1.5m lower than our estimates, but it was offset by higher-than-expected interest income (S$2.2m higher), higher-than-expected management fees payable in units (S$1.7m) and lowerthan-expected income tax (S$1.2m lower).
Average portfolio rents ticked up slightly to S$8.13 psf/month, from S$8.06 psf/month a quarter ago, reflecting still-positive rent reversions from renewals during the quarter. However, portfolio occupancy dipped 0.9ppt to 94.9% as at 30 June 2009, due to tenants consolidating space requirements.
5.4% of leases by net lettable area are up for renewal in 2H09, and 20% for next year. Prime rents fell 18.2% QoQ to S$8.60 psf/month as at 2Q09, and we expect a continued decline in office rents to trough at S$6 psf/month by 2011. Given shadow space and incoming supply, there is the risk of a sharper decline in rents to trough sooner than expected. Hence, we expect negative rent reversions in 2010 given the average portfolio rent of S$8.13 psf/month.
Gearing was maintained at 27.6% on all-in interest cost of 4.26% and interest cover of 3.18x. There is no refinancing risk for the next two years, in our view, as borrowings are due only in 2011.
We raise our FY09–11 DPU forecasts by 10–18% due mainly to higher-thanexpected interest income from the shareholder loan to ORQPL (unlisted) and a higher proportion of management fees paid in units. We upgrade our target price to S$0.84 from S$0.66. 12-month price target: S$0.84 based on a DCF methodology.
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