Suntec REIT - DBS Research 2015-10-23: Headwinds Abound

Suntec REIT - DBS Research 2015-10-23: Headwinds Abound SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - HEADWINDS ABOUND 

Hemmed in by double headwinds 

  • In the year ahead, the REIT’s earnings will be driven by new contribution from recently completed Suntec City Mall redevelopment. Due to headwinds in the retail sector however, we believe that earnings upside is capped as the mall’s rents have underperformed the Manager’s initial target. 
  • In addition, there could be downside risk for the REIT’s office assets, which are expected to see some volatility in rents and occupancies when new office supply enters the CBD from 2016 onwards. 


Weak retail outlook to cap upside from Suntec AEI 

  • Phase 3 of AEI works at Suntec City Mall was completed in Feb- 15, bringing the Mall’s nearly three-year, S$410m redevelopment to completion. 
  • While the Manager has achieved healthy committed occupancy rates of 96.4%, we note that average rents of S$12.03 psf pm have fallen short of the Manager’s initial target of S$12.59 in light of a difficult leasing environment. 
  • Vacancy and rental pressures at MBFC and ORQ. Over the quarter, contribution from One Raffles Quay (ORQ( fell 21% yo-y due to higher leasing commissions attributable to a significant lease renewal. Marina Bay Financial Centre Tower 1 & 2 (MBFC’s) earnings also declined by 11% as occupancy fell 2.3ppts to 97.7%. 
  • Looking ahead, we believe that 
    1. the lack of obvious demand drivers for use of office space in the CBD, and 
    2. large incoming supply of office in 2016, 
    will put pressure on rents and occupancies at these two assets, resulting in some earnings decline. 


Valuation: 


Maintain HOLD, TP S$1.58 

  • We have a HOLD recommendation on Suntec REIT, with a TP of S$1.58, after factoring in the divestment of Park Mall and slightly lower rental assumptions for Phase 3 of Suntec Mall AEI works. 
  • While dividend yield of 6.1% for FY16 is fairly attractive, total returns to our TP is insufficient at < 10%. 

Key Risks to Our View: 

  • Upside risk stemming from distributions from capital The Manager has indicated a willingness to use proceeds to mitigate the decline in DPU after the divestment of Park Mall. 
  • Additional capital distributions to support dividend to shareholders will present upside to our estimates.


Rachael TAN DBS Vickers | Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2015-10-23
DBS Vickers SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.58 DOWN 1.76


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