Sunday, April 24, 2016

Suntec REIT - Unwavering against headwinds

1Q16: Higher yoy revenue and NPI 
Despite the absence of Park Mall, 1Q16 distributable income from operations was in line yoy at S$56m. This was mainly thanks to the higher revenue and NPI from the completion of Suntec City Phase 3 and Suntec City Office. Distributions were boosted by capital distribution of S$4m from the sale proceeds of Park Mall, which notched distributable income up by 7.2% yoy. 

1Q16 confirmed our view that SUN’s DPU profile should be stable
With this S$4m capital distribution plus the redemption of S$280m convertible bonds due in 2018 and the 30%-investment in the Park Mall JV (S$115m), we estimate that SUN has S$11m of sales proceeds left. Taking cue from 1Q16, we believe that the remaining sales proceeds would be utilised to ensure a steady and sustainable DPU profile. We have accordingly factored this into our FY16-17F distributable income.   

Retail: actively renewing leases for Suntec City Phase 1
Committed occupancy for its retail portfolio stood at 98.6% at end-1Q16 (4Q15: 98%, 1Q15: 93.5%). Suntec City’s committed occupancy stood at 98.7% at 1Q16 (4Q15: 98%, 1Q15: 92.5%). However, renewals are likely signed at lower rates. 1Q16 overall committed passing rent is S$12 psf (4Q15: S$12.04 psf, 1Q15: S$12.15 psf). It reduced leases expiring in FY16 (mostly for Suntec Phase 1) to 23.1% (end-15: 27%). The mall secured a large tenant which may bring down leases expiring to the high-teens in 2Q16.

Office operating metrics worse off than retail
Committed occupancy for SUN’s office portfolio stood at 98.3% as at end-1Q16 (4Q15: 99.3%, 1Q15: 99.6%). Suntec office’s committed occupancy stood at 97.5% as at 1Q16 (4Q15: 99.3%, 1Q15: 99.6%). Leases secured in 1Q16 averaged S$8.67 psf (-2% qoq, -6% yoy). SUN signed c.225,000 sq ft of renewal leases in the quarter and brought down its leases expiring in FY16 to 6% (end-15: 14.9%). One of the major off-takers was from the technology sector. 

Unwavering against headwinds, Hold maintained
We believe that the headwinds SUN faces (as gleaned from its deteriorating operating metrics) is counterbalanced by its resolution to keep DPU steady. Hence, we maintain a Hold on the stock. We update our FY16-18 DPU by 0.1-2.5%, leading to a higher DDM-based target price. SUN trades at 0.8x FY16 P/BV and offers an FY16 dividend yield of 5.9%. 

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