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). 


What’s New 

  • 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%. 

What’s Our View 

  • 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


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