Singapore REITs - UOB Kay Hian 2016-07-22: 2Q16 Results Of AREIT (In Line) And Suntec REIT (Below)

Singapore REITs - UOB Kay Hian 2016-07-22: 2Q16 Results Of AREIT (In Line) And Suntec REIT (Below) REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI  SUNTEC REAL ESTATE INV TRUST T82U.SI 

REITs − Singapore: 2Q16 Results Of AREIT (In Line) And Suntec REIT (Below)

  • AREIT’s results came in within our expectations. AREIT is a beneficiary of the tight business park supply with the completion of the One@Changi City acquisition increasing business park exposure to 18% by asset value. Maintain BUY on AREIT with an unchanged target price of S$2.84. 
  • Suntec REIT’s results came in below expectations due to lower contributions from Suntec City as retail and commercial rents continue to ease. Management expects both the retail and office portfolio performance to stabilise going forward. Maintain HOLD on Suntec REIT with a lower target of S$1.90. 
  • Maintain OVERWEIGHT on the sector.


  • Ascendas REIT (AREIT) and Suntec REIT have reported their quarterly results.

Ascendas REIT (AREIT SP/BUY/S$2.49/Target:S$2.84)

Results in line with expectations. 

  • Maintain BUY with a target price of S$2.84, based on a two-stage dividend discount model (required rate of return: 6.4%, terminal growth rate: 1.5%). 
  • 1QFY17 DPU of 3.996 S cents was up 4% yoy, due to contributions from new acquisitions, which were partially offset by dilution from unit base expansion and payout to perpetual securities holders. Excluding capital gains, results came in within our expectations, with 1QFY17 DPU representing 25.5% of full-year forecast.
  • 1QFY17 saw gross revenue and net property income increase by 15.0% yoy and 20.3% yoy respectively, on the back of contributions from the acquisition of the Australian portfolio and ONE@Changi City.

Well-spread out lease expiry profile, with 16.6% of assets by rental income due for renewal in FY17, and 20.9% due in FY18. 

  • Management expects moderate (single digit) rental reversions in Singapore as average passing rents are near spot market rents. 
  • Management also expects upside upon backfilling of the 11.7% vacant space in its Singapore portfolio. 
  • In Australia, 2.2% and 20% of leases by gross revenue are due to see renewals in FY17 and FY18 respectively.

Capital recycling activities. 

  • The quarter saw the completion of two divestments – Four Acrs and AREIT Jiashan for S$34m and S$25.4m respectively. Total capital gains of S$3.8m were recognised. 
  • In addition, the divestment of Ascendas Z-Link was completed on 11 July for a sale price of S$154.7m or about 2.5 times the purchase price of S$61.8m

Strategic expansion of business park footprint as the micro-market registers muted supply and healthy pre-commitments. 

  • The completion of the One@Changi City acquisition has seen the business park share of AREIT’s total portfolio increase from 14% to 18% by asset value. 
  • AREIT is likely to be a beneficiary of the tight business park supply, with CBRE estimating 2016 business park pre-committed supply at 44% (no known notable uncommitted supply after). CBRE also purports signs of leasing interest from IT and pharmaceutical firms at the 1.1m sf (NLA) Mapletree Business City (MBC) Phase II (expected completion 2Q16). 
  • We note that media reports in Feb 16 identified Johnson & Johnson possibly taking up 170,000 sf of space at business/science park Ascent as its first anchor tenant. The 387,500 sf (NLA) project by Ascendas-Singbridge is slated for completion in 2Q16.

Potential dilution from Exchangeable Collateralised Securities (ECS) conversion. 

  • In 2010, AREIT issued S$300m in ECS to fund a collateral loan taken over 19 assets. The ECS bear a fixed coupon of 1.60% p.a and are exchangeable by the ECS holders into new units at the adjusted exchange of S$2.0187. 
  • As at Jun 16, S$14m of the ECS have been converted into 6.8m new units.

SUNTEC REIT (SUN SP/HOLD/S$1.785/Target: S$1.90)

Results below expectations

  • Results below expectations, maintain HOLD with a reduced target price of S$1.90 (previously S$1.94), based on DDM (required rate of return: 6.7%, terminal growth: 1.7%). 
  • Suntec REIT reported a 2Q16 DPU of 2.501 S cents, flat yoy. Excluding capital gains distribution, DPU would have declined 3.4% yoy. 
  • 2Q16 saw gross revenue and net property income register respective declines of 3.1% yoy and 7.5% yoy, due to absence of contributions from Park Mall, which was divested last year. 
  • The results came in marginally below expectations, with 1H16 accounting for 47.1% of full-year estimates, due to lower contributions from Suntec City. 
  • We lower our FY16 and FY17 DPU estimates by 0.7-1.3%, factoring in a decline in contributions from Suntec by 0.9-1.7% from lower rent assumptions. 177 Pacific Highway is slated for completion in Aug 16 (431,000 sf by NLA). 
  • Park Mall premises will be taken back in Sep 16 for redevelopment.

Bulk of expiring office and retail leases in 2016 forward renewed. 

  • Management’s proactive leasing strategy has left a paltry 1.8% in office leases by NLA due in 2016, with 17.4% office leases by NLA up for renewal in 2017. 
  • Despite the upcoming office supply glut, management remains confident of 2017’s office leasing outlook (403,733 sf due), pointing to its past track record (702,439 sf renewed in 2009, post GFC). 
  • Expiring retail leases have also seen active renewal efforts, with 7.9% by NLA left in 2016 and 25.6% in 2017. Management’s strategy remains one of driving occupancy levels to sustain operating performance.

Continued pressure on rentals. 

  • Overall committed portfolio rents continued to decline in 2Q16, slipping 3.5% qoq to S$11.58 psf pm. 
  • Overall negative rental reversion was observed for retail leases renewed this quarter (mostly Suntec City Phase 1 tenants), primarily due to a higher base effect, (recall that Suntec City Phase 1 passing rent was S$13.09 in Dec 13). 
  • Management remains more optimistic with regard to 2017 and 2018 expiring leases, attributable to Phase 2 and 3 tenants, with comparatively lower rents signed then. Management also observed the most weakness from fashion tenants. 
  • 2Q16 also marked the third consecutive qoq decline in office rentals signed for the quarter, though we note the rate of decline has slowed. Management expects both the retail and office portfolio performance to stabilise going forward.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-22
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.84 Same 2.84
HOLD Maintain HOLD 1.90 DOwn 1.94