Suntec REIT - CIMB Research 2015-12-09: Ramping up retail

Suntec REIT - CIMB Research 2015-12-09: Ramping up retail SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - Ramping up retail 

  • Suntec City Mall P3 opened in Jun 2015, boosting SUN’s revenue and NPI for 9M15 by 18% yoy and 20% yoy, respectively. 
  • Suntec Mall’s retail occupancy stood at 96.5% at end-Sep but overall passing rent of S$12.03 psf/month as at 3QFY15 was lower than it originally anticipated. 
  • Office portfolio continues to enjoy high occupancy, with positive rental reversion. 
  • Park Mall sale and redevelopment are still in the works. 
  • We are wary of the office downcycle, retail leasing risks and earnings vacuum from the redevelopment of Park Mall. Hence, we maintain our Hold recommendation. 

■ Suntec City Mall Phase 3 opens 

  • SUN’s revenue and NPI for 9M15 were up by 18% yoy and 20% yoy, respectively, due to the opening of Suntec City Mall P2 and P3, as well as the stronger performance by Suntec Singapore. 
  • The office portfolio achieved an average occupancy rate of 98.9%, while retail achieved 96.5%.
  • Overall, Suntec City has 96.4% committed occupancy. 

■ Retail continues to ramp up but rent lower than anticipated 

  • Given the ongoing retail headwinds, overall committed passing retail rent of S$12.0psf/month in 3Q15 was lower than the company’s target of S$12.59psf/month. 
  • With only 1.6% of retail net lettable area (NLA) remaining to be renewed for the rest of 2015, we think SUN’s 4Q15 earnings will remain steady. 
  • Another 27.7% of space is due to be renewed in FY15, largely from Suntec City Mall P1. 
  • We will continue to closely monitor its renewal activities. 

■ Office portfolio remains resilient 

  • Committed occupancy for Suntec office towers rose marginally qoq to 99.5% in 3Q15, with the latest leases securing rents of S$9.21psf/month. 
  • Park Mall’s committed occupancy stood at 97.8% at end-Sep 2015. With only 1.4% of leases due to expire in FY15 and another 21.4% in FY16, we think that the office portfolio will be fairly resilient. 

■ Unlocking value from Park Mall 

  • SUN is set to sell Park Mall for S$411.8m to a JV company that plans to redevelop the building into a commercial property comprising two office blocks with an ancillary retail component. 
  • Post-development, SUN will have the option to buy one of the office towers. The sale is subject to approval for the redevelopment and extension of the underlying land lease to 99 years. 
  • With present net gearing of 35.8% and recycling of capital from the sale, SUN is well positioned to undertake the exercise. 

■ Maintain Hold 

  • We are wary of the office downcycle, even though SUN’s office portfolio remains resilient. 
  • This, coupled with retail leasing risk from Phase 1 tenants entering their second leasing cycle, and earnings vacuum from the redevelopment of Park Mall lead us to maintain our Hold call, with an unchanged DDM-based target price of S$1.73.

LOCK Mun Yee CIMB Securities | 2015-12-09
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.73 Same 1.73