Suntec REIT (SUN SP) - Maybank Kim Eng 2016-09-08: Some Cushion for Impending Weakness

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Some Cushion for Impending Weakness

We raise our yield-based TP to SGD1.81. Our new target yield of 5.5% (from 6.0%) prices SUN at the low end of its historical trading range.
Stable capital values for office properties and a potential bottoming of office rents in the next 5-6 quarters should be positives. But with over 40% of its office leases up for renewal in the next two years, SUN is more exposed than peers to still-weak rents.
We lower market rent assumptions by up to 14% for office and cut passing rents for retail by 5%, which lowers our FY16-18 DPUs by up to 5.5%. Retail rents and occupancy at its Suntec City Mall have shown signs of weakness recently.
Nevertheless, maintain HOLD as we think capital distributions could cushion downside to property income.

SUN’s stakes in One Raffles Quay and MBFC Phase 1 should benefit directly from strong office capital values in the vicinity. However, its office lease-expiry profile is the least favourable among peers. Some 40% of its office leases will be up for renewal in the next two years: 17% in 2017 and 24% in 2018. This could force SUN to lock in lower rents at a time of market weakness or risk rising vacancies.
Nonetheless, we think management could cushion the impact on its DPUs with capital distributions from the sale of Park Mall.

Committed rents for Suntec City Mall were down 3.5% QoQ in 2Q16 to SGD11.58 psf pm. Committed occupancy also slipped 1.2ppts to 97.5%.
We think these may be early signs of weakness for its retail portfolio.

Our forecasts assume a bottoming of office rents by end-2017 and the start of a recovery in 2018. A prolonged office downcycle poses risks to our estimates.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-08

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.81 Up 1.690