Suntec REIT - CIMB Research 2017-01-25: Largely in line

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Largely in line

4Q/FY16 results largely within expectations; FY16 DPU formed 98% of our forecast.
Income vacuum from asset sale and cessation of income support continue to drag.
Suntec retail bottoming out but recovery could be slow.
Two potential acquisitions in the pipeline in the medium term.

SUN reported a 5% decline in 4QFY16 distributable income to S$66m (DPU: 2.596 Scts) due to the divestment of Park Mall and cessation of income support from MBFC properties, and slightly lower capital distribution of S$8m. This was despite a 2% increase in revenue, thanks to increased contributions from 177 Pacific Highway.
For FY16, DPU of 10.03 Scts was flat yoy on higher capital distribution of S$24m.

Singapore’s office committed portfolio occupancy remained high at 99.3% at end-4Q16.
SUN renewed 686ksf (122ksf in 4Q16) of office space in FY16 at an average rent of S$8.65psf/month, slightly higher than the overall CBD office rent. It has a remaining 9.3%/21.3% of office leases expiring in FY17/18F.
While SUN’s portfolio is targeted at smaller office tenants, the large incoming new supply is likely to continue to drag rents down in 1H17. Hence, it plans to focus on forward renewals and tenant retention.

The Singapore retail portfolio is 97.7% committed after it signed 410ksf of leases in FY16. Post AEI, Suntec Mall is 97.9% taken-up with shopper footfall rising 16% yoy to 39.9m in FY16. Average passing rent for the mall has inched up to S$11.20psf.
With leases in P1 of the property largely marked to market, we think the worst may be over for the property. That said, given the anemic retail scene in Singapore, we think any recovery in rents is likely to be modest in the near term.

In terms of inorganic growth, SUN has a 30% stake in a JV to redevelop the former Park Mall into a 367,000sf office-cum-retail property, at a total cost of S$800m. After completion at end-2019, SUN will have the right to buy one of the two office towers.
In addition, under an earlier put and call option entered into with Dexus, SUN (or its JV Southgate Trust) can purchase the remaining 50% share in Southgate Complex. This could potentially increase its share in the Southgate Complex by another 25-50%.

In terms of debt refinancing, SUN has S$100m and S$1.1bn of debt due to be rolled over in FY17-18 while interest cost is low at 2.28%. SUN’s current gearing stands at 37.7% vs. its optimal target of 40%.
With limited debt headroom, we think SUN could fund the medium-term potential new acquisitions pipeline through a combination of debt and equity.

We lower our FY17-18F DPU estimates by 2.4-2.5%, following the latest set of results, and tweak our DDM-based target price to S$1.55 as we roll forward our numbers.
SUN’s share price has done well in recent weeks and offers limited upside in the near term. Hence, we maintain our Reduce rating and will look to buy on weakness.
Key risk to our call would be a faster-than-expected recovery in the retail sector.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-01-25

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