Suntec REIT - Maybank Kim Eng 2015-10-23: Softer operating performance

Suntec REIT - Maybank Kim Eng 2015-10-23: Softer operating performance SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - Softer operating performance 

  • 3Q15 DPU of 2.522 SGD cts in line. Capital distribution lends strength to operations. 9M15 at 77.4% of full-year estimates. 
  • Guided down on passing rents at Suntec retail. Occupancy at MBFC offices weakened. However, debt metrics remained healthy. 
  • Maintain SELL and SGD1.33 TP (FY16E target yield of 7.25%). Less attractive yields than office peers. 

DPU in line; Operating performance softened 

  • 3Q15 DPU of 2.522 SGD cts (+8.3% YoY, +0.9% QoQ) was in line, with 9M15 at 77.4% of our full-year estimates. 
  • Capital distribution of 0.182 SGD cts (7.2% of total) continues to lend strength to underlying performance. 
  • Retail headwinds continued to weigh on performance at Suntec with stabilized passing rent falling to SGD12.03 psf pm (from SGD12.12 psf pm in 2Q15). 
  • Office occupancy at MBFC Tower 1 and 2 also weakened to 97.7% from full occupancy previously. 
  • On a positive note, occupancy at its Suntec offices improved amidst the weak leasing market. Debt metrics remained healthy with aggregate leverage of 36.7% (+50bp QoQ) and financing cost of 2.74% (+4bp QoQ). 

Exposed to weakness in office and retail 

  • We maintain our negative view on Suntec REIT. 
  • Firstly, its exposure to the soft office market remains high with 21.4% of office leases due to expire in 2016. This could drive down rents at its portfolio. 
  • Secondly, we see the oversupply of downtown retail space hurting performance at its mall. Lastly, its forward yield of 5.9% is less attractive than its office peers (2016E yield: Keppel REIT: 6.5%, CapitaLand Commercial Trust: 6.2%) even though our forecasts already include capital distributions from the sale of Park Mall. 
  • Maintain SELL with unchanged SGD1.33 TP, based on FY16E target yield of 7.25%.

Derrick Heng CFA Maybank Kim Eng | 2015-10-23
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.33 Same 1.33