Suntec REIT - 4Q16 Results Flash ~ Decent results but headwinds ahead
- We reiterate our NEUTRAL rating and maintain our earnings/DPU forecast for Suntec REIT.
- We retain our DDM-based TP of SGD1.53. The stock offers FY17 dividend yield of 6.0%.
- 4Q16 DPU declined 5.6% YoY, while full year DPU was unchanged at 10.003 cents. Results were in-line accounting for 100% of our full year forecast. Decline in 4Q DPU was mainly driven by divestment of Park Mall and cessation of income support for MBFC, which was partially offset by higher contribution from 177 Pacific Highway.
- For FY16, Suntec REIT distributed SGD24m (FY15: SGD19m) from capital, especially from the sale proceeds of Park Mall disposal.
- JV contributions (FY16) were down 6.6% YoY due to cessation of income support for MBFC, which was partially offset by higher income from One Raffles Quay (ORQ) and recently acquired Southgate complex (Southgate).
- Gearing stands at 37.7% with all-in financing cost of 2.28%. About 60% of its outstanding debt has fixed interest rate.
- Office and retail portfolio occupancies remains high at 99.3% and 97.7%, respectively. Valuation remains steady across its properties with adjusted NAV/unit at SGD2.12.
- Demolition works have commenced on 9 Penang Road (former Park Mall), in which Suntec has 30% stake. The site will be redeveloped into to office towers (352,000 sq ft) and retail space (15,000 sq ft). The total estimated development cost for redevelopment is about SGD 800m (including lease top-up to 99 years) and is expected to be completed by end of 2019.
- Construction of 177 Pacific Highway was completed in Aug 2016. The building is 100% occupied with a WALE of eight years and will start contributing fully in current financial year.
- Management acquired 25% interest in Southgate during Aug 2016 with an initial NPI yield of 5%. Suntec REIT also has a call/put option to acquire remaining 50% interest in Southgate, which it plans to acquire by mid-2017.
- About 9.3% of its office leases are expiring in 2017. The rents for expiring leases are in the range of SGD8.50- 9.00psf per month and management expects slight negative reversion ahead.
- On the retail front, about 22.5% of its leases are expiring in 2017 and we expect to see some negative rent reversions in the retail segment amidst a challenging retail market environment. On positive front Suntec City Mall shoppers traffic has picked up sharply by +16% post recent revamp.
- Suntec REIT is currently trading at forward yield of 6% and 0.8x P/BV, which we think is fair considering the headwinds faced by Singapore’s office and retail sector.
- Maintain NEUTRAL with unchanged TP of SGD1.53.