DPU up 2% QoQ. Suntec REIT recorded a 2.3% QoQ and 16% YoY increase in 1Q09 revenue to S$64.9m. Unitholders get 2.918 S cents for the quarter (up 2% QoQ and 15.9% YoY). Results were better than expected, with Suntec's gross revenue and distributable income outperforming our 1Q estimates by about 4-7%.

Rents down but still incremental. An overhang of supply and uncertainty of demand are key concerns for the office sector. 3.7% of Suntec City office lies vacant, up from 1.8% a quarter ago. We understand that a couple of tenants are only renewing part of previously occupied space. The manager said maintaining occupancy above the 90% level is a key priority. Some 527k sf of office leases are up for renewal in FY09, with an average rent of S$5.33 psf pm. The manager has already renewed more than half of these, at around S$9.96 psf pm on average. The remaining 237.6k sf of office space expiring this year is currently earning an average rent of S$6.64 psf pm - we note the margin of safety between achieved rents (down 11% QoQ) and average rents on expiring leases (up 25%) has narrowed quite dramatically - but is still adequate, in our opinion.

S$825m facility in place. Suntec has secured a S$825m term loan facility to refinance the S$125m in MTN and S$700 in CMBS loans maturing this year. The deal, a seven-bank club loan facility, is structured as a S$725m 3-year loan and a S$100m 7-year fixed rate loan. The manager said the facility costs a blended all-in interest margin of less than 375 bps over the base rate (versus an all-in financing cost of 3.02% in 1Q09). The cost of debt is significantly higher, but a fair reflection of the current lending environment, in our view. This announcement clears one "elephant in the room" but it does not change our view on Suntec's potential need for an equity issue to address falling capital values.

We still see some value. Our SOTP value for Suntec is S$0.91, down 4% from S$0.95 due to minor adjustments. Our fair value estimate is unchanged at S$0.80, a 12% discount to our SOTP value. This incorporates our assumption of a S$500m equity issue at the S$0.60 level. Suntec is up 31% since our last report in March. We still see some room on the upside, with current price levels 21% below our fair value, along with a 14% FY09F yield (35% total return). Maintain BUY.