Suntec REIT’s aggregate leverage was at 39.1%

Suntec REIT:
fair value now drops from S$1.59 to S$1.10.

Stock appears fairly priced
● 4QFY11 results above estimates
● Stepping up proactive leasing strategy
● Suntec City AEI to start in Jun

4QFY11 results exceeded expectations.
Suntec REIT reported 4QFY11 NPI of S$52.0m and distributable income of
S$55.3m, up 10.1% and 23.1% YoY respectively. The decent results were achieved despite the negative rental reversions in its office portfolio, thanks to higher contribution from MBFC Properties and greater interest savings from prudent capital management. DPU was up by 7.0% YoY to 2.479 S cents, bringing the full-year DPU to 9.932 S cents, or a yield of 8.7%. The results were slightly ahead of market expectations, with FY11 DPU forming 106.6%/102.4% of our/consensus DPU forecasts.

Portfolio metrics remained stable pre Suntec City AEI.
Overall office and retail portfolios, we note, also registered marginal improvements in occupancy to 99.2% and 97.5%. Management said that it will be taking on a proactive approach towards its leasing strategy in view of the uncertain economic outlook. We understand that only approximately 10.0% of its office leases by NLA are due to expire in 2012, after management renewed more than 233,000 sq ft of the leases. As at 31 Dec, Suntec REIT’s aggregate leverage was at 39.1%. This is an improvement from its leverage of 41.8% seen in 3Q, helped mainly by a positive S$396.2m revaluation of its investment properties (NAV up by 10.1% YoY to S$1.99.)

Maintain HOLD.
Management also provided little details on the asset enhancement initiatives (AEI) on Suntec City, but reiterates that it will minimize disruption when the works commence in Jun. We now factor in Suntec City AEI (consequent drop in occupancy and rental income) and the consolidation of Suntec Singapore into our FY12-13 forecasts. Using the DDM valuation model, our fair value now drops from S$1.59 to S$1.10, roughly in line with its three-year average P/B of 0.6x. As the stock appears fairly priced at current level, we maintain our HOLD rating on Suntec REIT.

Overall office portfolio over the quarter registered an improvement in occupancy from 98.6% in 3QFY11 to 99.2% due mainly to the absorption of office space vacated by IDA at Suntec City. Leases secured, we note, averaged at a rent of S$8.72 psf pm, slightly higher than the S$8.41 psf rent attained in prior quarter. On the retail front, the overall portfolio occupancy had also improved marginally by 0.2ppt QoQ to 97.5%. In addition, committed retail passing rents at Suntec City and Chijmes were relatively stable at S$10.09 (-0.1% QoQ) and S$10.79 psf pm (+0.5% QoQ) respectively, while Park Mall saw a sequential rise of 2.5% in passing rents to S$7.51 psf.