Capital management in 2009 will need a re-jig of both debt and equity: an adverse operating outlook on our revised forecasts likely to send Suntec REIT’s interest coverage ratios over the next 3 years to just over 2.1x, a level at which we believe will be considered unsustainably low. The REIT has S$825million of debt securities maturing in 2009 (the bulk of which matures in Dec 09) and we feel the trust will need to secure permanent, long-term funding well ahead of the deterioration in the REIT’s operational data.

Declining DPU trend: Our new forecasts incorporate an assumption of peaking rents in 2009 and lower occupancy especially in the REIT’s office space, and whilst we expect asset writedowns to increase gearing levels to 40-45%, this is ultimately the lesser of the REIT's difficulties. Of concern to equity investors may be our DPU estimates which we forecast to decline by almost a third over the next three financial years.

Implied cost of equity of 10.4%, other comparables more attractive. We calculate Suntec REIT’s implied cost of equity at 10.4%, which is high but not as attractive as comparable large cap S-REIT CapitaCommercial Trust (implied cost of equity of about 11.7%) for the same or superior risk profile.

Lowering target price to S$0.64 (S$1.34 previously): Post results, we have trimmed our DPU estimates by 3-19% in FY09/10E, and set a new Dec 09E target price of S$0.64 based on DDM using an equity cost of capital assumption of 10.89% to reflect increasing credit risk. Key upside risks to our target price and rating come from a lower than expected deterioration in operating fundamentals, or if the REIT is able to secure stable and permanent funding at lower cost than we have assumed.