Suntec REIT (SUN SP) - Maybank Kim Eng 2017-04-26: Resilient Performance

Suntec REIT (SUN SP) - Maybank Kim Eng 2017-04-26: Resilient Performance SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Resilient Performance

Maintain HOLD; Prefer CCT 

  • 1Q17 was in line at 25% of our full-year estimates. Resilient signing rents and high committed occupancy at Suntec City Offices were key positives.
  • Exposure to office headwinds were also lowered with office leases due to expire this year brought down to 5.9% from 9.3%. 
  • Fresh disclosures on retail footfall and tenant sales at Suntec City Mall showed improving operating performance. 
  • We have not factored in any dilution from its potential CB conversion, which could trim DPU by 4%. 
  • Maintain HOLD with unchanged SGD1.76 TP, based on a target yield of 5.50%. 
  • Prefer CCT (BUY, TP SGD1.81) for cleaner DPU profile.

1Q17 inline; Suntec offices resilient 

  • 1Q17 DPU of 2.43 SGD cts inline at 25% of full-year estimates. 
  • Despite the challenging office market, occupancy at Suntec City’s offices improved 0.5ppt to 99.0%. Signing rents were resilient at SGD8.66 psf (4Q16: SGD8.52). 
  • Office leases due to expire in 2017 has been brought down to 5.9%, from 9.3% at 4Q16. 
  • Occupancy at Suntec City Mall remains unchanged at 98.4%. Management provided fresh disclosures on retail footfall (+7.3% YoY) and tenant sales (+4.3% YoY) showing better operating performance. 
  • Contributions from ORQ improved by 29% YoY to SGD8.9m due to one-off items in the quarter.

Potential 4% dilution if outstanding CB converted 

  • Management recently announced that the change in ownership at ARA (private) implies that holders of its SGD300m convertible bonds (CB) can now exercise their rights to convert their CBs into REIT units at SGD1.74 (from SGD2.06). This implies that another 1% of outstanding shares could be issued. We have not built-in the impact of this potential conversion, but estimate a potential 4.3% DPU downside if fully converted. 
  • Aggregate leverage, however, will improve from 37.7% to 34.5%. CB holders have until 15 May 2017 to exercise their conversion rights.

Good value in stock 

  • Similar to other office REITs, Suntec REIT offers good value with the current unit price implying undemanding SGD2,065 psf capital value and 4.3% cap rates for its Singapore offices. 
  • Nonetheless, we prefer CCT for its cleaner DPU that is not supported by capital distributions.

Derrick Heng CFA Maybank Kim Eng | 2017-04-26
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.76 Same 1.760