Suntec REIT announced 1Q09 DPU of 2.92 cents (+16% yoy, +2% qoq), slightly above expectations on the back of higher rental reversions. For the quarter, Suntec city office achieved rents of S$9.96 psfpm, down 11% qoq, for some 0.3mn sqft of expiring office space, though still +50% above expiring rates of S$6.64 psfpm. Of note is Suntec’s gradually falling occupancy, 97.4% for the REIT’s office space (down from 98.7% qoq), reflecting the weakening rental outlook. Results were lifted by Suntec’s S$825mn new term loan to refinance borrowings under MTN and CMBS (S$700mn due Dec 09). All-in interest margin of about 3.75% (existing CMBS below 3.0%) is well below recent refinancing tranches of 4.5%-5.0%. Suntec has no more debt maturing until 2011. Gearing is 34.4%.

Maintain Buy, as we view the refinancing as a near-term catalyst for the shares, as it removes the short-term cash call overhang the market appeared to expect. While we think a cash call is still possible, Suntec now has the time and flexibility (18-month window). While we remain cognizant of deteriorating fundamentals for commercial office (we expect prime office rents to fall to S$6.5 psfpm by 2010E), we still see value at current levels. A deeper read would be that the Singapore financial system remains relatively liquid and there are funds available for lending (especially those with good credit), although banks have become more selective in extending credit. Suntec is currently trading at an attractive yield of 14%/13% for FY09E/FY10E and 0.3X book. Maintain DCF-based 12-mo target price of S$0.88. Risk: Further macro deterioration weighing down on rents.