OCBC Investment Research 2015-07-24: Suntec REIT - Cloudy earnings visibility. Maintain SELL.

Suntec REIT: Cloudy earnings visibility 

 2Q15 DPU up 10.3% YoY 
 Rental pressures to remain 
 Keep our SELL rating and FV 

2Q15 results within our expectations 

  • Suntec REIT reported a 19.6% YoY increase in its 2Q15 gross revenue to S$81.4m, underpinned by the opening of Phase 2 of Suntec City mall in Jun 2014 and better performance from Suntec Singapore. 
  • DPU grew 10.3% YoY to 2.50 S cents, of which 0.239 S cents/unit was contributed by distribution from capital. 
  • For 1H15, Suntec REIT’s gross revenue jumped 16.3% to S$155.9m, forming 49.4% of our FY15 forecast. 
  • DPU of 4.73 S cents represented growth of 5.2%, and this made up 48.8% of our full-year projection. 
  • We view this set of results as in-line with our expectations. 

Leasing headwinds persist 

  • Although committed occupancy at Suntec City mall’s Phase 3 improved to 86% (end-1Q15: ~80%), we opine that this is still at a suboptimal level since most tenants have already commenced operations. 
  • This muted leasing momentum is reflective of the challenging retail environment. 
  • Overall committed occupancy to-date for the Suntec City AEI stood at 95.3% (+1.7 ppt QoQ), while overall committed passing rent of S$12.12 psf per month was a slight decline from 1Q15 (S$12.15 psf per month) and 4Q14 (S$12.27 psf per month). 
  • Rental pressures are likely to remain, in our view. 
  • Meanwhile, on the office front, Suntec City’s committed occupancy slipped from 99.6% to 98.4%, which management attributed to frictional vacancies. 
  • Leases secured for the quarter came in at an average rent of S$9.14 psf per month, slightly lower than 1Q15’s S$9.24 psf per month. 
  • Management remained positive on its office portfolio performance in 2015, but we believe its earnings visibility for 2016 is cloudier, given the large upcoming supply. 
  • Suntec REIT has 22.6% of its total office NLA (545,491 sq ft) expiring in 2016. 

Maintain SELL 

  • Regarding Suntec REIT’s proposed divestment of Park Mall for S$411.8m, (expected to be completed by 3Q15), we expect a dip in distribution from operations, but management highlighted that it is open to making capital distributions from the sales proceeds to mitigate this. 
  • We maintain our forecasts, SELL rating and S$1.50 fair value estimate on Suntec REIT. 

(Wong Teck Ching Andy)

Source: http://www.ocbcresearch.com/