Suntec REIT - OCBC Investment 2016-07-22: Take profit on rich valuations

Suntec REIT - OCBC Investment 2016-07-22: Take profit on rich valuations SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT: Take profit on rich valuations

  • 2Q16 DPU flat YoY.
  • Boost from capital distributions.
  • Proactive lease management.

2Q16 results within our expectations

  • Suntec REIT’s 2Q16 gross revenue declined 3.1% YoY to S$78.9m. This was a result of the divestment of Park Mall, but partially mitigated by contribution from the opening of Suntec City mall (Phase 3) following the completion of its AEI. 
  • DPU was flat at 2.501 S cents, and was boosted by a distribution from capital amounting to S$8m (0.316 S cents per unit), versus a distribution from capital of S$6m (0.239 S cents per unit) in 2Q15. 
  • Results were in-line with our expectations. 
  • For 1H16, Suntec REIT’s gross revenue inched up 0.9% to S$157.3m and this formed 46.2% of our FY16 forecast. DPU increased 3.0% to 4.872 S cents and constituted 48.4% of our full-year projection.

Passing rents continue to soften

  • Suntec REIT proactively managed its lease expiry profile during the quarter, bringing down both its office and retail lease expiries for the remainder of the year. 
  • Management signed 176,000 sq ft and 165,000 sq ft of office and retail leases, respectively, in 2Q16. As such, Suntec REIT is left with a balance of 1.8% of its office NLA and 7.9% of its retail NLA which is up for renewal in 2H16. 
  • Office leases secured in 2Q16 came in at an average rent of S$8.58 psf/month, which was lower than the average S$8.67 psf/month signed in 1Q16. Management attributed this to 60,000 sq ft of anchor tenant space which was renewed. 
  • On the retail front, Suntec City mall’s overall committed passing rent stood at S$11.58 psf/month, as at 30 Jun 2016. Management said that there more negative than positive reversions for its 1H16 retail renewals. These were largely made up of leases for Suntec City mall (Phase 1), which had achieved a passing rent of $13.09 psf/month back in 2013. 
  • Committed occupancy for its office and retail portfolio was 98.9% and 97.7%, as at end 2Q16, respectively.

Reiterate SELL

  • We raise our fair value estimate on Suntec REIT to S$1.54 (previously S$1.51), as we factor in a lower risk-free rate assumption of 2.4% (previously 3.0%) in our model. However, we maintain our SELL rating as we believe valuations remain rich. 
  • Suntec REIT is trading at 5.6% FY16F distribution yield, which is more than half a standard deviation below its 5-year average forward yield of 6.1%.

Wong Teck Ching Andy CFA OCBC Securities | 2016-07-22
OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 1.54 Up 1.51