Suntec REIT - OCBC Investment 2016-10-21: Softer retail rents but office rents recovered

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Softer retail rents but office rents recovered

Suntec REIT reported an in-line set of 3Q16 results. Gross revenue fell 4.3% YoY to S$82.4m. This was attributed to the divestment of Park Mall and weaker income from Suntec Singapore, but partially offset by contribution from 177 Pacific Highway following its practical completion in Aug 2016 and increase in revenue from the opening of Suntec City mall (Phase 3) after its AEI.
DPU rose 0.5% YoY to 2.535 S cents, despite a lower distribution from capital of 0.158 S cents (-13.2%).
For 9M16, Suntec REIT’s gross revenue was down 1.0% to S$239.7m, while DPU of 7.407 S cents represented growth of 2.1% and formed 74.0% of our FY16 forecast.

Suntec REIT continued its proactive approach to manage its lease expiry profile during the quarter. Management successfully brought down its lease expiries for its office and retail portfolio to 0.4% and 2.4% (as percentage of NLA) for the remainder of FY16, respectively.
For FY17, 12.2% of office leases and 22.9% of retail leases are up for renewal. Encouragingly, office leases signed in 3Q16 came in at an average rent of S$8.78 psf/month, which was an increase of 2.3% on a QoQ basis.
However, retail rents continued to come under pressure, as Suntec City mall’s overall committed passing rent was S$11.19 psf/month, as at 30 Sep 2016. This was weaker than the committed rents of S$11.58 psf/month secured in the previous quarter.
In terms of occupancy rates, Suntec REIT’s office and retail portfolio stood at 99.4% (+0.5 ppt QoQ) and 97.3% (-0.4 ppt QoQ), respectively.
Management intends to drive shopper traffic at its malls by strengthening its tenancy mix with flagship shops and new-to-market concepts, while preserving its stronger tenants.

We fine-tune our assumptions after incorporating this set of results in our model, and also factor in Suntec REIT’s proposed acquisition of an effective 25% interest in Southgate Complex in Melbourne, Australia.
Our FY16 DPU forecast is unchanged, but we lower our FY17 DPU projection marginally by 0.6%.
Consequently our fair value estimate inches downwards from S$1.54 to S$1.53.
As current price is above our FV, we maintain our SELL rating.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-10-21

OCBC Investment SGX Stock Analyst Report SELL Maintain SELL 1.53 Down 1.540