Suntec REIT - RHB Invest 2016-01-27: Further Downside Risk In Office Renewals

Suntec REIT - RHB Invest 2016-01-27: Further Downside Risk In Office Renewals SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT (SUN SP) - Further Downside Risk In Office Renewals 

  • 4Q15/FY15 results were within our expectations, while we note that its retail portfolio has stabilised. However, we maintain SELL with a SGD1.31 DDM-derived TP (13% downside), implying 0.61x FY15 P/BV. 
  • We are cautious on Suntec REIT mainly due to its high exposure to office space. 
  • Also, we highlight that more than a third of its office portfolio would be facing renewal in the next two years, which would post further declines in office rent rates. 

 4Q15/FY15 results were within our expectations 

  • ... registering DPU growth of c.7/6% YoY, meeting c.100% of our full year estimate. If we were to strip off capital gains top up from its previous divestments, DPU would have grown a mere 3% YoY for the full year. 
  • Its gearing ratio remained stable at c.36%, while the REIT would be facing a total SGD250m debt expiry. 

 We see further impact on its office spaces in the next two years. 

  • Though occupancy rates for Suntec REIT’s office portfolio remained stable at c.99%, we note that leases secured for the quarter fell c.4% QoQ. 
  • Given the pessimistic outlook within the office rental market, we think that its office rents would be impacted further till 2017. 
  • Bear in mind that collectively, c.34% of its total office net lettable area (NLA) would be facing lease expiry in the next two years. 

 Retail portfolio has stabilised after Suntec City AEI official opening. 

  • On the other hand, Suntec REIT’s retail occupancy inched up to c.98% as Suntec City AEI managed to ink an additional 1.6% of its space in the last quarter. 
  • Its overall committed passing rent has stabilised at SGD12.04 psf/month, below its initial target of SGD12.59 psf/month. 

 Maintain SELL with an unchanged TP of SGD1.31. 

  • Given Suntec REIT’s high exposure of office lease renewal in the next two years, we remain cautious in the current challenging office rental environment. In addition, we are also wary of its redevelopment effort on assets such as Park Mall. We maintain our SELL recommendation with a DDM-derived TP of SGD1.31. 
  • Risks to our estimates: better than expected office rental rates

Ivan Looi RHB Invest | 2016-01-27
RHB Invest SGX Stock Analyst Report SELL Maintain SELL 1.31 SAME 1.31