Suntec REIT - RHB Invest 2016-07-22: Lowering Rentals To Hold Up Occupancies

Suntec REIT - RHB Invest 2016-07-22: Lowering Rentals To Hold Up Occupancies SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - Lowering Rentals To Hold Up Occupancies

  • We reiterate SELL with a higher SGD1.50 TP (from SGD1.31, 16% downside), as the operating environment remains challenging. 
  • We note that it has lowered rental consecutively to hold up occupancies. However, this may prove to be futile if the leasing downtrend becomes protracted, with no signs of bottoming-out. 
  • Last quarter saw another capital distribution of SGD8m from the sale proceeds of Park Mall, which otherwise would have resulted in 2Q16 DPU to dip 3.4% YoY. 
  • We remain cautious on the REIT mainly due to its high exposure to office space and Suntec City Mall’s lacklustre retail scene. 
  • We also highlight that 18% of its office portfolio will be facing rent renewal in the next two years. It will post further DPU declines (sans DPU top-ups) with falling office rent rates. 

1H16 results were within our expectations 

  • 1H16 results were within our expectations registering DPU growth of 3% meeting 49.2% of our full year forecast. It was driven by distribution from capital. Stripping it off, DPU declined by 2.1% YoY. 
  • Its gearing ratio remained stable at 36.1% with the average term to expiry extended to 2.83 years.

We see further downside risks in its office spaces in the next two years.

  • Though occupancy rates for Suntec REIT’s office portfolio remained stable at 98.9%, we note that the average rent for leases secured for the quarter fell 6.1% YoY to SGD8.58psf/mth. 
  • Given the pessimistic outlook within the office rental market, we think that its office rents would be impacted further till 2017. 

No uplift at Suntec City Mall post-remaking. 

  • Overall committed passing rent for Suntec City Mall continues to fall since its peak of SGD12.69 psf/mth in 1Q14 to SGD11.58 psf/mth last quarter. 
  • Occupancy remained stable at 97.5% but passing rents have fallen below the SGD12 mark for the first time, and 8% below its initial target of SGD12.59 psf/month. 
  • More than half of Suntec REIT’s retail portfolio leases are up for renewal over the next three years. This is in the backdrop of a general decline in consumer spending where retailers are focused on re-channeling funds and manpower towards profitable outlets whilst consolidating loss-making and unprofitable outlets in Singapore.

Australian asset update and rich valuations. 

  • The construction of 177 Pacific Highway (net leasable area of 431,000 sqf) in North Sydney is on-track for completion in August. 
  • Management expects a 6.9% yield on completion. Suntec REIT is currently trading at a forward yield of 5.6% and 0.84x P/BV. 
  • We think valuations are rich at this level and see more downside risks ahead. 
  • This report marks the transfer of coverage back to Ong Kian Lin.

Ong Kian Lin RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-22
RHB Invest SGX Stock Analyst Report SELL Maintain SELL 1.50 Up 1.31