Suntec REIT - OCBC Investment 2018-01-25: Flat Performance, Rich Valuations

Suntec REIT - OCBC Investment 2018-01-25: Flat Performance, Rich Valuations SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Flat Performance, Rich Valuations

  • 4Q17 DPU +0.3% y-o-y.
  • Robust footfall and tenants’ sales.
  • Unattractive 4.7% FY18F yield.

4Q17 results within our expectations 

  • Suntec REIT reported an in-line set of 4Q17 results. Gross revenue and NPI declined 1.8% and 2.2% y-o-y to S$87.3m and S$59.4m, respectively. This was attributed to lower revenue from Suntec Singapore and its office portfolio, but partially offset by higher retail income from Suntec City Mall. 
  • DPU improved 0.3% y-o-y to 2.604 S cents, boosted by a 19.7% increase in distribution from capital. 
  • For FY17, Suntec REIT’s gross revenue jumped 7.8% to S$354.2m and met 100.3% of our forecast. DPU for the full-year came in flat at 10.005 S cents, or 100.1% of our projection.

Better outlook but not expecting a strong recovery

  • Overall portfolio occupancy was at 99.2% for Office and 98.8% for Retail. There was an increase in valuation for a number of its assets including Suntec City Mall (+0.2%), 177 Pacific Highway (+9.4%), Suntec Convention (+3.0%) and Southgate Office (+10.4%). 
  • Average rents of S$8.50 psf/month and S$8.03 psf/month were secured for its Singapore office portfolio and Suntec City office, which was lower by 1.3% and 3.8% q-o-q, respectively. For the latter, the dip was partly due to two anchor tenants which typically command lower rentals on a psf basis. Excluding these two tenants, rental reversions were down ~5% in FY17. 
  • On the retail front, Suntec City Mall registered healthy growth in footfall (+12.8%) and tenants’ sales psf (+4.8%) for FY17. Occupancy cost for Suntec City mall was 22-23%. Management believes there is room to lower this by bringing in stronger tenants, reducing poor performing tenants, and helping existing tenants to improve. 
  • Whilst the outlook has improved, we are still expecting some challenges in the near-term.

Downgrade to SELL 

  • We incorporate this latest set of full-year results in our model, and roll forward our valuations. This results in a marginally higher fair value estimate of S$1.81 (previously S$1.80)
  • Based on our forecast, Suntec REIT is trading at a distribution yield of 4.7% for FY18F, which comes in approximately 2.2 standard deviations below its 5-year mean of 5.7%. We opine that valuations are rich at this juncture, and believe the markets have more than priced in a strong recovery in Singapore office rentals. 
  • Downgrade Suntec REIT to SELL from Hold.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2018-01-25
OCBC Investment SGX Stock Analyst Report SELL Downgrade HOLD 1.81 Up 1.800