Suntec REIT - 9M15 below street's estimates; continued decline in retail rents

Suntec's 9M15 DPU of S¢7.25 missed expectations accounting for 75% of ours but only 73% of street's FY15E. Excluding the S¢0.421 DPU top up, the results made up only 71% of ours and 69% of street's full-year estimates.

Suntec office occupancy edged back up to 99.5% from 98.4% in 2Q15 whilst occupancies at MBFC and ORQ dipped slightly. We reiterate our view of a potential downside risk to occupancy and rents, given the large looming supply in 2016/17.

Suntec City Mall rents were marginally lower QoQ at S$12.03 psf with overall occupancy (Ph 1 - 3) now at 96.4%. 289,420 sq ft (27.7% of retail portfolio) is up for renewal next year, which largely consists of expiries at Ph 1 where rents were originally signed at S$13.09 psf/month in 2013.

Maintain UNDERPERFORM. Suntec trades at a 2015 yield of 5.9% and is the most expensive office REIT. There could be downside risk with 40.4% of Suntec's office portfolio expiring in 2016/2017 while reversions at Suntec City Mall are also likely to be under pressure.

Suntec's 9M15 DPU of S¢7.25 missed expectations accounting for 75% of ours but only 73% of street's FY15E. Excluding the S¢0.421 DPU top up, the results made up only 71% of ours and 69% of street's estimates. 9M15 NPI rose 20.3% YoY mainly due to the reopening of Suntec City mall (Ph 2 and 3) and improved contribution from Suntec convention centre. Contribution from associates (MBFC and ORQ) fell 8% YoY due to a drop off of -31.1% YoY in income support at MBFC Properties. As a result DPU rose 5.2% YoY (4.6% excl. DPU top up).

Suntec office occupancy edged back up to 99.5% from 98.4% in 2Q15. Occupancies at MBFC and ORQ dipped slightly to 97.7% and 99.8%, respectively. Average rents of new leases signed at Suntec office remained stable at S$9.21 psf/month. Given the large supply completing in 2016/17, we highlight that there is a potential downside risk to occupancy and rents. Whilst only 1.4% of total office NLA is left for renewal in 2015, 21.4% and 19.0% is still expiring in 2016 and 2017, respectively.

Suntec City Mall rents marginally lower at S$12.03 psf (S$12.12 psf in 2Q15, S$12.15 psf in 1Q15). Suntec City's overall occupancy inched up 1.1 pp QoQ to 96.4%. Only 16,734 sq ft (1.6% of total retail NLA) is due to expire in 2015, whilst 289,420 sq ft (27.7% of retail NLA) is up for renewal in 2016. This will mainly consist of expiries from Ph 1 of Suntec City Mall where rents were originally signed at S$13.09 psf/month in 2013.

Gearing rose 0.5 pp QoQ to 36.7% as total debt outstanding increased by ~S$60 mn. All-in financing cost edged up to 2.74% from 2.7% in 2Q15.

Technical Analysis
Daily Chart
Maintain UNDERPERFORM. Suntec trades at a 2015 yield of 5.9% and is the most expensive office REIT. We believe there could be downside risk with 40.4% of Suntec's office portfolio expiring in 2016/2017, while reversions at Suntec City Mall are also likely to be under pressure. (Read Report)

Read Related Reports
1) Suntec REIT - Headwinds Abound by DBS Group Research, published on 23 October 2015

2) Suntec REIT - Softer operating performance by Maybank Kim Eng Research, published on 23 October 2015

3) Suntec REIT - Outlook remains uncertain by OCBC Investment Research, published on 23 October 2015

4) Suntec REIT - Declining Rents In Suntec City AEI by RHB Research, published on 23 October 2015

5) Suntec REIT - 3Q15 results in line, rents fall further at Suntec retail by Deutsche Bank Markets Research, published on 22 October 2015

6) Suntec REIT - 3Q15 results: office strong, retail still weak by Daiwa Capital Markets, published on 22 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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