2Q15: Extracting Value
- Although management expressed concerns on the huge upcoming supply of offices, they remained positive on the performance of Suntec office in 2015 owing to its locational advantages, unique integrated characteristics as well as ample car park lots.
- The redevelopment of Park Mall will help unlock value from the under-utilised GFA.
- Management targets to achieve 100% occupancy before the official opening of Suntec City on 22 Oct 15.
- Maintain BUY with an unchanged target of S$2.08.
RESULTS
• Results in line with expectations.
- Suntec REIT reported a 2Q15 DPU of 2.50 S cents, up 10.3% yoy mainly to the higher revenue and net property income from the completion of Suntec City Phase 2.
- Distributable income included a S$6m payment from capital (sales proceeds from Chijmes). The 1H15 DPU is in line with our expectations, accounting for 47.5% of our full-year estimate.
- Office portfolio occupancy level stood at 99% (-1ppt qoq) with signing rents for Suntec office leases in the quarter coming in at S$9.14psf/month (+2.4% qoq).
- Overall committed occupancy for the retail portfolio stood at 95.1% with the committed occupancy for Suntec City at 94.7% while the committed occupancy for Park Mall was at 97.8%.
- Debt-to-asset ratio stood at 35.3% while the average all-in financing cost was 2.70% for 2Q15.
STOCK IMPACT
• Management remains confident of the office portfolio’s healthy performance in 2015.
- Although management expressed concerns on the upcoming supply from Marina One, Guoco Tower and Duo, they remain positive on the performance of their office portfolio in 2015 owing to Suntec’s locational advantages and unique integrated characteristics as well as ample car park lots.
- Suntec signed about 169,000 sqf of renewals and replacement leases in 2Q15, reducing the balance of office leases expiring in 2015 to 6.0%.
• Expect healthy correction in the office segment before a pick-up.
- In 2Q15, Grade-A office rentals saw downward easing of 0.9% qoq to hit S$11.30 psf pm, as Core CBD vacancy saw a dip of 8bp qoq to 3.8% This marked the end of six quarters of consecutive growth which office rents enjoyed from 4Q13 to 1Q15.
- Office rental growth moderated from 3-5% per quarter in 1Q14-3Q14 to about 2% per quarter in the past two quarters (4Q14 and 1Q15).
- We expect 2H15 rents to remain stable as the next surge of office supply will only arrive in 2H16/2017, which could result in a healthy correction (5-10%).
- Beyond 2017, supply remains meagre at below 0.6m sf that should lead to a pick-up in rental growth.
• Unlocking value from Park Mall.
- Suntec REIT earlier announced the S$411.8m divestment of Park Mall (total cost S$245m) and entry into a JV for the redevelopment of the property of which Suntec REIT has a 30% interest.
- Management believes that the redevelopment will unlock the underlying value of the property by further enhancing the GFA of the site, taking advantage of the two strips of land acquired and the bonus plot ratio for sites near to MRT stations.
- At the same time, an application has been made to refresh the property’s land tenure to 99 years (from 53 years remaining).
- Management guided that part of the sale proceeds may be used to mitigate the dip in DPU arising from the divestment.
• Park Mall will be redeveloped
- Park Mall will be redeveloped into a commercial development comprising two office blocks with an ancillary retail component.
- The other parties involved in the JV are Phoenix 99, which holds 35% of the JV (wholly-owned by SingHaiyi Group Ltd) and Haiyi Holdings, which holds the remaining 35%.
- Under the JV, Suntec REIT will have the ability to acquire one office block and the JV partners collectively will have the ability to acquire the other office block.
- Suntec REIT will have the right of first refusal to acquire the retail podium, following strata-subdivision of the redeveloped property.
- The JV parties have committed to provide up to S$384m of funds for the acquisition and redevelopment cost based on the parties’ proportionate share, taking up external financing to fund the redevelopment of the property.
• Challenging retail environment but expect some reprieve in 2H15.
- Management has raised concerns of an increasingly challenging retail climate, partly attributed to tightening of labour laws that have contributed towards increased operating costs and a shortfall of visitor arrivals especially, Chinese tourists with The Singapore Tourism Board’s (STB) latest figures showing a 6% yoy decline in visitor arrivals for 1Q15.
- However, STB forecasts a 0-3% growth in visitor arrivals for 2015 supported by a slew of events like the 2015 SEA Games, SG50 celebrations, and Formula One.
• Suntec retail asset enhancement ROI at over 9%
- Suntec retail asset enhancement ROI at over 9% though the overall committed passing rent of S$12.12 fell short of the initial guidance of S$12.59 psf pm due to a challenging retail climate.
- Phase 3 of the AEI attained TOP in Feb 15 saw a precommitted occupancy level of 86%.
- This brings the overall committed occupancies for Suntec City Mall to 94.7% (1Q15:93.6%).
- Management targets to achieve 100% occupancy by the official opening of Suntec City on 22 Oct 15.
EARNINGS REVISION/RISK
- We retain our earnings estimates.
VALUATION/RECOMMENDATION
- Maintain BUY with an unchanged target of S$2.08.
- Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 2.2%).
SHARE PRICE CATALYST
- Well-managed execution of Suntec's AEI, with impact on occupancies and rentals mitigated.
- Positive news-flow on office and retail capital values, AEI, tenant movements and renewals, rentals and occupancy.
(Vikrant Pandey; Derek Chang)
Source: http://research.uobkayhian.com/
