Suntec Reit - subjected to pressure as Singapore goes through the recession

Our fundamental view of Suntec REIT has not changed. We feel revenue is still being subjected to pressure as Singapore goes through the recession. We feel key issues for the management will be to maintain the rental while keeping occupancy of the portfolio stable.

Suntec REIT has 64% of its portfolio NLA exposed to the office sector and 34% exposed to the retail sector. 77% of office leases are expiring over the next 3 years and we are concern about falling reversionary rent achieved by the expiring office leases. Although expiring leases rent is lower than the passing average rent, however average rent for leases secured has peaked out in 2Q08 and has fallen 26% in 1Q09. Furthermore, Suntec REIT office portfolio could come under pressure from the completion of over 9.2 million sqf of office space in the core downtown area over the next five years. Given that our outlook is for a bottoming of office rent in 2010Q4, we would expect the gap between expiring leases and renewal leases to converge with a negative bias.

Suntec has no near term refinancing concern. It has successfully secure $825 million of term loan in April 2009. The current gearing is 35%. Although management has not indicated any acquisition plans, we believe that Suntec will build up its equity balance for two reasons; in anticipation of asset devaluation and to ready itself for any opportunities that arise for its next phase of growth. Currently Suntec owns approximately 57% of Suntec City Office Towers, it may resume its program to acquire strata office units not presently owned.

Valuation & recommendation. We revise our average rent and occupancy assumptions and reduce our DPU forecasts over FY09F-FY11F by 4%-9%. We maintain our Hold rating and raise our fair value from $0.69 to $0.94 mainly on lower WACC assumptions.

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