Suntec REIT - CIMB Research 2016-07-22: Time for a breather

SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Time for a breather

2Q DPU of 2.5 Scts expected, at 24% of our FY16 forecast; 1H16 DPU at 48%. The stable DPU was owed to higher capital distribution.
Slight dip in office renewal rents, strategy to maintain stable and high occupancy.
Retail rents dragged by negative reversions as Suntec Mall P1 are marked to market.
New income boosters from 177 Pacific Highway and Park mall redevelopment.

Downgrade SUN to Reduce after recent rally, with the stock looking pricey against peers and its historical trading bands.

2Q/1H DPUs of 2.5/4.4 Scts were in line with expectations. 2Q16 revenue dropped 3% yoy to S$78.9m due to the loss of income from sale of Park Mall, and NPI worsened by 7% yoy to S$52.7m due to higher property expenses for Suntec Spore.
Nonetheless, distribution income for the quarter rose to S$63.3m on the back of stronger JV contributions and higher capital distribution of S$8m (1Q: S$4m) from the divestment of Park Mall.

SUN renewed 176ksf of office leases in 2Q at a slightly lower average rent of S$8.58psf, thanks to a higher proportion of anchor tenant renewals. It also maintained high office portfolio occupancy of 98.9%.
With its expiry profile reduced to a small 1.8% in 2H16 and 17.4% in FY17, SUN’s strategy is to keep occupancy at its properties stable.
We expect office spot rents to trend down on the back of a large influx of new office supply and anticipate this to be a drag on SUN's office revenue over the next two years.

Meanwhile, SUN re-contracted 165ksf of retail space in 2Q, with average rents slipping 3.5% qoq to S$11.58psf while occupancy was kept high at 97.7%. The dip was largely due to the renewal of leases in P1 of the Suntec City Mall AEI, which was contracted at the peak of the market three years ago.
As more and more of leases are re-pegged to market levels, we believe retail rents could stabilise towards end-FY16.
SUN has 7.9% and 25.6% of its retail space up for renewal in 2H16 and FY17, respectively.

We anticipate 177 Pacific Highway, an office property in Australia slated to be completed in Aug 16, to be major earnings driver for SUN in FY17.
We estimate that SUN will enjoy a higher 6.9% NPI yield from this property post completion. The building is 100% pre- committed, with 76% taken by Leighton Group and the remaining 24% supported by a rental guarantee for four years.

In the medium term, Park Mall could provide another income source when redevelopment completes.
SUN holds a 30% stake in the JV to rebuild this site into an office building with a small retail component over the next few years. SUN will likely fund its share of equity (S$115m) from Park Mall's sale proceeds.
No details on the cost and expected returns of this exercise have been revealed. As such, we have not factored in any impact into our forecasts. SUN’s leverage ratio of 36% also provides significant debt headroom.

We lower our FY16-18 DPU estimates by 2-8% as we fine-tune our rental assumptions.
Our DDM-based TP (S$1.67) is unchanged as lower cost of equity assumptions is offset by the DPU cuts.
We downgrade SUN to Reduce after the recent rally, as it is pricey against peers and historical trading bands.
Upside risk could come from new contributions from Park Mall.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-22

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 1.67 Same 1.67