Suntec REIT - Maybank Kim Eng 2016-07-22: Offices holding up; Retail weakness showing

SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Offices holding up; Retail weakness showing

Suntec REIT mitigated the decline in property income with higher capital distributions.
Occupancy for Suntec City offices improved with the pace of rent decline slowing.
Retail performance was weak with overall passing rents falling by 3.5% QoQ. This was due to negative rental reversions from lease renewals from Phase 1 of the asset enhancement initiatives (AEI).

Our TP is raised to SGD1.69 from SGD1.56 for a 50bps cut in target yield to 6.00%. This reflects yield compression from lower benchmark rates.
Maintain HOLD.

2Q16 DPU of 2.50 SGD cts (+5.5% QoQ, +0% YoY) is in line. 1H16 made up 48% of our full-year estimates.
Its revenue and net property income (NPI) declined by 3.1% YoY and 7.5% YoY due to the divestment of Park Mall for redevelopment. This loss of income was partly offset by higher contribution from its retail operations due to the opening of Phase 3 of the mall.
It mitigated the decline in property income with higher capital distribution of SGD8m (2Q15: SGD6m), which made up 12.6% of distributable income in the quarter of SGD63.3m.
ORQ and MBFC enjoyed near full occupancy.

Occupancy improved by 0.6ppt to 98.1% at Suntec City offices as it continues to fill up spaces vacated by Oracle earlier. The pace of rent decline at Suntec offices slowed.
Signing rents of SGD8.58 psf pm was down 6.1% YoY, but dipped just 1.0% QoQ.
Despite persistent headwinds for Singapore’s office market, management continues to guide for stable performance for its office portfolio.

Suntec City Mall’s occupancy dipped slightly to 97.5% due to the exit of some tenants. It signed 165,000 sf of retail leases in the quarter and reduced its lease expiry to just 7.9% for 2016.
Negative rental reversions brought down overall passing rents for the entire mall to SGD11.58 psf pm from SGD12.00 in 1Q16.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-22

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.69 Up 1.56