Suntec REIT - CIMB Research 2016-10-20: Retail continues to drag

Suntec REIT - CIMB Research 2016-10-20: Retail continues to drag SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Retail continues to drag

  • 3QFY16 DPU of 2.535 Scts was in line, accounting for 25% of FY16F estimate.
  • Retail rental revenue dragged down by Park Mall sale and negative reversions at Suntec Mall.
  • Office rental revenue supported by new acquisitions.
  • Robust balance sheet with little refinancing risk in FY17.
  • Maintain Hold with unchanged TP of S$1.68.

3QFY16 results in line 

  • Suntec reported a 4.3% yoy decline in 3QFY16 revenue to S$82.4m (US$59.7m) while distributable income rose 1.1% yoy to S$64.3m (US$46.6m). 
  • Despite lower contribution from Suntec Singapore and income vacuum from Park Mall, bottomline improved thanks to the rental income from the completion of 177 Pacific Highway office, higher JV contributions, lower interest expenses and capital distribution of S$4m. 
  • 3QFY16 DPU of 2.535 Scts (+0.5% yoy) made up 25% of our FY16F estimate, in line with expectations.

Retail rental environment remains challenging near term 

  • Retail revenue fell 12.4% yoy due to Park Mall sale. 
  • While it renewed 5.5% of its retail leases in 3Q and maintained occupancy of 96.8% at Suntec Mall, average rents slid qoq to S$11.19psf. 
  • It continues to reposition and rejig the property’s tenant mix, bringing in new-to-market and concept stores such as Superdry and Gudetama, and improve shopper experience. However, as Suntec continues to turn over its tenant mix, we expect retail rents to remain depressed, although declining at a more moderated pace.

Income growth driven by office acquisitions 

  • Office revenue rose 12.8% yoy due to income from the newly-completed 177 Pacific Highway office as well as the renewal of 1.4% of office leases at Suntec City in 3Q at a slightly higher rent of S$8.78psf. The former is 100% occupied and generates a 6.9% NPI yield. 
  • Looking ahead, the scheduled completion of the acquisition of a 25% stake in Southgate Complex, by 4Q16, should also add to portfolio office income. 
  • In addition, Suntec has 12.2% of office leases due to be re-contracted in FY17.

Robust balance sheet 

  • Suntec’s balance sheet remains strong with a gearing of 37.8%. It has little refinancing due over the next two years with only 3.4% of total loans due to be rolled over in FY17.
  • All-in refinancing cost dipped to 2.28% from 2.77% in 2Q with an average debt maturity of 2.91 years.

Maintain Hold 

  • We adjust our FY16F DPU estimate by 1.6% to account for the S$4m capital distribution in 3QFY16 and leave our DDM-based TP unchanged at S$1.68. 
  • Suntec currently offers investors a total return of 3-4%. Due to the lack of near-term catalysts, we maintain our Hold call. 
  • Upside risk to our call includes a faster-than-expected recovery in its retail rental income while downside risk could come from negative office rental reversions.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | 2016-10-20
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.68 Same 1.680