Suntec Reit

Suntec Reit: good 2Q11 results, slightly ahead of expectations.
DPU at 2.53cts surpassed mgt’s and the Street’s forecast, driven by lower interest cost and a higher MBFC contribution.

Net property income of $47m, -1.1% yoy, to lower contributions from both its office and retail components. Nevertheless, NPI was up 0.5% qoq, and mgt is optimistic that negative rental reversion at Suntec City Office Tower would bottom this yr, with avg signing rents rising marginally from $9.22psf to $9.28psf. Suntec Office occupancy remains full at 99.5%.

Suntec City Mall however, is still under pressure with occupancy falling from 97.9% to 97.1% and avg rents sliding 1.1% qoq to $10.16 psf. Mgt is studying potential asset enhancement plans for the mall, with possible updates to come over the next 3-6mths.

StanChart believes the mgt could seek planning approval to add >300k sf of net lettable retail space, as the 2 new MRT stations could justify up to 10% additional GFA. But notes with Suntec’s current aggregate leverage ratio of 40.5% already at mgt’s target gearing of 40%, an equity raising would be needed to fund any significant capex. Believes the AEI could be accretive if ROI exceeds 6%.

StanChart, Deutsche maintain Hold with TP $1.51, $1.62 rptvly.
Macquarie upgrades to Outperform from neutral, raises TP to $1.76 from $1.64.