AEI making good progress. Pre-commitments for Suntec City Mall's (SCM) Phase 1 post-AEI leases hit 83% in 4Q12 and we believe most were secured above the targeted SGD12.59 psf/mth. Suntec also reported that 37% of Phase 2 NLA has been pre-committed. We note that Phase 2 AEI for SCM has commenced and the intensity of the refurbishment works could mean that overall AEI works should wrap up as scheduled by 4Q14. We estimate that the largest dip on FY13 DPU will occur in 1Q-2Q13, when Phase 1 new tenants have yet to start paying rentals and Phase 2 old tenants are being vacated for the AEI.

Portfolio review. As of end-Dec 2012, Suntec City office remained at full occupancy with leases secured for the quarter at an average rent of SGD8.98 psf pm (3Q12: SGD8.96 psf pm). With less than 23% of office leases due to expire each year for the next three years, we believe Suntec’s proactive leasing management will continue to optimise its office portfolio. We are also heartened that only about 22% (by gross rental) of Suntec City office tenants are from the banking, insurance and financial services industries, which are most susceptible to an economic downturn. Due to Phase 1 AEI works, we estimate SCM's occupancy rate fell to 74-76%. One Raffles Quay stood at full occupancy, while occupancy for the MBFC1 rose to 99.9% from 99.5%. There was a dip in Park Mall office occupancy from 100% to 94.6% due to one tenant (NUS) vacating ~19k sq ft of space. New tenants have since been found and occupancy currently stands at ~98%.

Convertible bonds. Suntec has issued a SGD280m convertible bond (CB) due 2018 at an interest rate of 1.4% (initial conversion price of SGD2.154). About SGD231.7m will be used to refinance its existing debt, which includes the SGD270m CB issued in 2008 with final redemption date on 20 Mar 2013 and coupon interest of 3.25%. Following cash settlement and cancellation, the principal amount of the 2013 CB remaining outstanding is SGD216.25m, which will be redeemed by the REIT at 105.5063% of its principal amount. We estimate interest savings of ~SGD5m pa.

DPU top-up reserved for FY13. Suntec received net cash of ~SGD147m from the sale of Chijmes in 1Q12. We think it will keep the flexibility for DPU top-up in 2013, when its mall occupancy will be most affected (DPU: 9.3 cents in FY13F vs 9.49 cents in FY12). Reiterate BUY with the TP raised to SGD1.90 in view of interest savings and the possibility that average passing rents for SCM post-AEI may be secured at SGD13.50 psf/mth, above Suntec’s target of SGD12.59 psf/mth.

Source: Maybank Kim Eng Research - 26 Mar 2013