Suntec REIT - Sustaining its full-year DPU
- 4Q16 DPU down 5.6% YoY.
- Proactive leasing management.
- Environment still challenging.
4Q16 results within our expectations
- Suntec REIT reported an in-line set of 4Q16 results. Gross revenue inched up 1.6% YoY to S$88.9m, as contribution from 177 Pacific Highway after practical completion offset the loss of income from the divestment of Park Mall and lower revenue from Suntec Singapore. DPU declined 5.6% YoY to 2.596 S cents given the drag from a lower NPI (-2.9% to S$60.7m), higher borrowing costs and cessation of income support for MBFC properties. For FY16, Suntec REIT’s gross revenue was down marginally by 0.3% to S$328.6m, while DPU was sustained at 10.003 S cents (flat YoY). Both figures formed 99.9% of our full-year forecasts.
Rental pressures likely to remain
- Leases signed in 4Q16 for Suntec REIT’s Singapore office portfolio came in at an average rent of S$8.65 psf/month, slightly lower than in 3Q16 (S$8.78 psf/month), while committed occupancy for its office portfolio in Singapore was at a healthy 99.3%. However, looking ahead, we believe rental pressures would likely remain, given the uncertain macroeconomic environment and upcoming supply of office space this year.
- Cognisant of this fact, Suntec REIT has been actively managing its lease profile, and has only 9.3% of its office NLA (271,325 sq ft) expiring in 2017. On the retail front, occupancy for its Singapore retail portfolio stood at 97.9%, as at 31 Dec 2016, with overall committed rents at Suntec City Mall relatively stable at S$11.20 psf/month, versus S$11.19 psf/month, as at 30 Sep 2016, following three consecutive quarters of QoQ declines. 22.5% of its retail NLA (209,486 sq ft) is up for renewal this year.
Upgrade to HOLD
- We incorporate Suntec REIT’s full-year results in our model, and also update our valuation parameters by factoring in a higher risk-free rate of 2.7% (previously 2.4%) in light of a steeper yield curve environment.
- As we also roll forward our valuations, our DDM-derived fair value estimate inches slightly upwards to S$1.54 from S$1.53.
- Given expected potential total returns of -3.2%, we upgrade Suntec REIT to HOLD.
- The stock is trading at FY17F distribution yield of 6.0%, which is in-line with its five year forward mean of 5.9%.