DPU top-up unlikely in 3Q12. As a result of Phase 1 AEI work, which started in Jun 2012, we expect revenue from Suntec Mall to slide from SGD103m in FY11 to SGD86m (16% decline) in FY12F. Occupancy rate is likely to fall to 75-78% by year-end (excluding the space vacated by Carrefour). Carrefour takes up some 137k sq ft of NLA and will likely depress occupancy rate to ~60% when its lease tenure expires 31 Dec 2012. Nonetheless, we are confident that Suntec REIT should be able to pay out DPU of at least 2.15 Singapore cents for 3Q12 and at least 9.0 Singapore cents for the full year. We also do not think that Suntec will use its Chijmes divestment proceeds to top up its 3Q12 DPU. It may want to keep this flexibility for 4Q12 when there is greater clarity on its full-year distributable income.

AEI making good progress. From our observation, refurbishment works have been progressing well, with Suntec Convention and the Galleria/Fountain Terrace zones proceeding full steam ahead. Food Republic has ceased operations and tenants at Fountain Food Terrace are expected to vacate by end Oct. We think pre-commitments for Phase 1 leases should hit at least 65% presently and Phase 2 AEI should commence on time by Apr-May 2013. We estimate that the largest dip in mall occupancy should occur in FY13F at ~59%, but this will improve in FY14F to ~70%.

Office portfolio in good shape. Against a background of office supply glut (Pipeline supply of 24% of available Downtown Core stock by 2012-2016) and high vacancy rates (Downtown Core vacancy at 13% in 2Q12), we are heartened that Suntec has secured 100% occupancy for Suntec Office, Park Mall Office, One Raffles Quay and 99.5% for MBFC1. With less than 22% of office leases NLA expiring per annum for the next three years, we remain positive that Suntec’s proactive leasing management will tread cautiously to optimise its office portfolio.

Upgrade to BUY on brighter prospects. There are only a handful of S-REITs that offer yields of more than 6% but are trading at discounts to book. Suntec is one of them, with a yield-spread of 463bps compared to the sector average of 436bps. With all its assets and income contribution from Singapore, we believe investors will continue to favour Suntec in the absence of forex risk (all SGD), highly-liquid S-REIT counters (ADTV >USD8m) and investable alternatives. In addition, in this inflationary and yield-chasing climate, yields for Suntec could be compressed further to 5.5% in our view. Upgrade to BUY with a higher target price of SGD1.66.

Source: Maybank Kim Eng Research - 8 Oct 2012