Suntec REIT - UOB Kay Hian 2017-04-27: 1Q17 Results Of Suntec (In Line)

SUNTEC REAL ESTATE INV TRUST T82U.SI

REITs − Singapore - 1Q17: Results Of Suntec (In Line)

Suntec REIT’s results are in line with expectations.
Office rentals were flat qoq, while Suntec City Mall saw higher tenant sales and shopper traffic.
Maintain HOLD on Suntec REIT with an unchanged target price of S$1.80.

Results in line with expectations, maintain HOLD with DDM-based target price of S$1.80 (required rate of return: 6.7%, terminal growth: 1.4%).
1Q17 headline DPU of 2.425 S cents was up 2.3% yoy. Excluding capital distributions, core DPU of 2.307 S cents was up 4.2% yoy.
1Q17 top-line grew 12.9% yoy, while NPI saw growth of 14.6% yoy, mainly attributable to rental contributions from 177 Pacific Highway which received TOP in Aug 16.
The results were within expectations, with 1Q17 DPU coming in at 22.7% of fullyear estimates.

The office segment saw the renewals and replacement of approximately 130,000 sf of leases, leaving a balance of 5.9% by net lettable area (NLA) due to expire in 2017. Management expects the performance of the Singapore office portfolio to continue seeing supply-side pressure.
Singapore office portfolio rents were flat at S$8.66 psf pm (4Q16: S$8.65 psf pm).
Footfall and tenant sales up at Suntec City Mall, with shopper traffic up 7.3% yoy and tenant sales up 4.3% yoy in 1Q17. Management has decided to cease providing information on overall rents at Suntec City Mall going forward.

The premises were taken back in Sep 16 and are currently undergoing demolition works, with a targeted completion by end-19.
Recall that the 10-storey building consists two wings with an approximate NLA of 352,000 sf of office space across eight floors and 15,000 sf of retail space on one floor. The development cost is estimated at S$800m with scheduled completion by end-19, which implies a breakeven cost of S$2,180 psf and expected valuation of above S$2,500 psf including development margin, which seems on the high side. However, assuming S$8-10 psf pm for rents would mean an incremental revenue stream of S$11.9m p.a. for Suntec’s 30% share.

Two of 2017’s largest office developments, 1.9m-sf Marina One and 0.3m-sf UIC Building now have pre-commitments of 60% and 50% respectively, according to industry consultant CBRE.
We also note that Grade-A office absorption of 93.6k sf has outperformed the broader office market, as island-wide office space registered negative net absorption of 47.4k sf.

According to CBRE, Grade-A office rentals declined 1.6% qoq in 1Q17 to hit S$8.95 psf pm (21.5% decline from 1Q15’s peak of S$11.40 psf pm).
We opine that Grade-A rental decline could fast be approaching a bottom, especially as qoq declines have been slowing since 3Q16 (-2.1% qoq), vs qoq declines during 3Q15-2Q16 (-3.5% to -4.8%).

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-27

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.800 Same 1.800