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

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.

Park Mall income vacuum offset by capital distribution

  • 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.

Strategy to maintain stable and high office occupancy

  • 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.

Negative reversions a drag on retail rents; could stabilise by yearend

  • 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.

Completion of Australian property an income booster

  • 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.

Park Mall redevelopment a medium-term driver

  • 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.

Downgrade to Reduce with an unchanged TP

  • 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 | 2016-07-22
CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 1.67 Same 1.67