Suntec REIT - Maybank Kim Eng 2015-09-08: Highly Exposed to Office Weakness.

SUNTEC REAL ESTATE INV TRUST T82.SI

Highly Exposed to Office Weakness

Cut FY15-17 DPU by 10.8% for lower rent assumptions & higher vacancies.
Least favourable lease-expiry profile among office REITs. However, DPU may be supported by committed retail rents & capital distribution after divestment of Park Mall.
Downgrade to SELL from HOLD with lower TP of SGD1.33 from SGD1.89, now based on FY16 yield target of 7.25%, from DDM.
For exposure to office sector, prefer CapitaLand Commercial Trust (HOLD, SGD1.25 TP).

We cut 2015-17 market-rent assumptions from +6%/-6%/+2% to - 1%/-10%/-3%. Given an impending market surplus, we also build in 3% vacancy rates for all its offices in FY16. Although it has the least-favourable lease-expiry profile among our office REITs, DPU may be supported by committed retail rents and capital distribution after its divestment of Park Mall.
We expect management to use the proceeds to partly pay down debt and partly for capital distribution to mitigate income losses. We cut FY15-17 DPU by 10.8%.

With 23% of its office leases due to expire in 2016, Suntec REIT is highly exposed to an impending market weakness, in our view.
We have not factored in income contributions from the redevelopment of Park Mall as completion will be beyond our forecast years. We do not see re-rating prospects given a lacklustre office outlook and an oversupply of downtown retail space.
We cut TP to SGD1.33 from SGD1.89 after a change in valuation methodology across our REITs from DDM to FY16 yield targets.
Our target yield for Suntec REIT is 7.25%. Downgrade to SELL from HOLD.

Derrick Heng CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-09-08

SELL Downgrade HOLD 1.33 Down 1.89