Suntec REIT 1Q12 revenues increased 20% yoy

Target Price S$1.45



Results
- Results in line with expectations. Suntec REIT reported a 1Q12 distributable income of S$54.9m (3.8% yoy, -0.8% qoq) and a DPU of 2.45 S cents (7.0% yoy, -1.0% qoq). The 1Q12 DPU is in line with our expectations, accounting for 26.4% of our full-year DPU forecast.

- Revenue growth from consolidation of Suntec Singapore. 1Q12 revenues increased 20% yoy due to the consolidation of revenues from Suntec Singapore (Convention Centre). Suntec REIT had raised its effective stake in Suntec Singapore in 3Q11 to 60.8% from 20%. This was balanced against the divestment of Chijmes on 20 Jan 12.

- Suntec office at full occupancies. Occupancy for Suntec REIT’s office portfolio reached

99.4% in 1Q12, up 0.2ppt qoq, driven by the 99.5% occupancy at Suntec City office. Portfolio retail occupancies trended down 0.2ppt to 97.3% due to the 96.7% occupancy in Suntec City Mall in preparation for the upcoming asset enhancement initiative (AEI).

- Interest costs remain largely unchanged with all-in financing costs falling marginally by 3bp to 2.78% in 1Q12. Gearing also remained at 37.4% during the quarter.

Stock Impact
- Unveiling the new Suntec. Suntec REIT’s phase 1 of the redevelopment of Suntec City Mall has seen strong interest, with an estimated 45% of net leasable area (NLA) pre-committed to date. Key anchors include a 20,000 sf H&M store, while another yet unnamed international fashion retailer has committed to 22,000 sf of space. Other established brands such as GAP, Guess, La Senza, Dickson Watch, Sincere Watch and Swarovski have also signed up for retail space in phase 1. Phase 1 will also see Food Republic, Paradise Group and a hypermarket unveil new concept stores.

- Impact of AEI at Suntec City Mall to be limited to approximately 193,000 sf of space (24% of the mall’s 819,000 sf) which will be closed in phases starting from Jun 12. When phase 1 is completed in mid-13, 380,000 sf of retail space, including retail space converted from existing convention space, will be ready for occupancy, and this is equivalent to a good-sized suburban mall such as Tampines Mall (330,000 sf) or Causeway Point (420,000 sf). The mall’s net property income (NPI) is expected to increase by 33% to S$23.2m, representing a 10.1% ROI and 84% increase in capital value over estimated capital expenditure of S$230m. The funding would be supported by sale proceeds from the Chijmes divestment (net proceeds of S$173.5m) and internal bank borrowings.

- Positive rental reversions amidst full occupancies at Suntec offices. Office leases signed in 1Q12 in Suntec City were secured at S$8.79 psf pm, up 1.0% qoq, with negative rental reversions largely out of the picture. Suntec City offices are essentially at full occupancy, with offices leases due for renewal this year down to 7.5%, thus reducing direct competition with larger vacant spaces at nearby Centennial and Millenia Towers. Management is confident that the office portfolio will outperform in 2012.

- No major fund raising and refinancing required until 2013 as less than 10% of debt is due to expire in 2012. Following the sale of Chijmes, Suntec will have enough funds to fund the first two phases of the AEIs. We do not anticipate any equity fund raising unless there is a major asset acquisition.

Earnings Revision/Risk
- We have adjusted our 2013-14 DPU forecast by +2% to +3% to account for additional details about new space available from the AEI of Suntec City Mall.

Valuation/Recommendation
- We maintain BUY with a higher target price of S$1.45 (from S$1.35) based on a 5% discount to the DDM (required rate of return: 8.1%, terminal growth: 2.0%) derived fair value of S$1.54.

Share Price Catalyst
- Well-managed execution of Suntec AEI, with impact on occupancies and rentals mitigated.

- Positive newsflow on office and retail capital values, asset enhancement initiatives (AEI), tenant movements and renewals, rentals and occupancy.

Fair value S$1.20


1Q12 results roughly in line
Suntec REIT reported 1Q12 NPI of S$49.0m (+5.0% YoY), making up 25.6% of our FY12 NPI forecast. The YoY growth was mainly due to the consolidation of Suntec Singapore (S$3.3m contribution), which more than offset the income loss following the divestment of Chijmes. Income contribution from ORQ and MBFC Properties rose by 16.0% YoY to S$26.9m on the back of higher dividend income. However, net financing costs were 15.7% higher. Consequently, distributable income came in at S$54.9m, representing a 3.8% increase. This translates to a DPU of 2.453 S cents (+2.7%), forming 26.8% of our full-year projection.

No sign of weakness in occupancy
Suntec’s portfolio occupancy had held up steadily during the quarter. The committed occupancy at Suntec City Mall was maintained at 96.7%, while that of its office actually strengthened by 0.3ppt QoQ to 99.5%. Management guided that only 7.5% of its office leases are due to expire in 2012 and that the renewals achieved to-date were strong. As such, it is confident that its office portfolio would surpass its performance in previous year.

Maintain HOLD on valuation grounds
Suntec also shed more light on Suntec City’s impending asset enhancement initiative in Jun, saying that ~193,000 sqft of retail NLA will be closed progressively in phases for Phase 1 works. Upon completion in 2Q13, the NLA is likely to increase to 380,000 sqft. On its marketing front, Suntec had already secured pre-commitments for over 45% of the enlarged NLA (e.g. sizeable take-up of 20,000 sqft by H&M). In addition, the projected rental enhancement of 25% and ROI of 10.1% appear to be on track. This leads Suntec to give a somewhat more positive outlook, that is, to ponder utilizing part of the proceeds from Chijmes sales to mitigate the temporary dip in DPU, only when necessary. We also note that Suntec may benefit from GST refund on income support, which may buffer the end of income support at ORQ. We now revise our NLA and rental assumptions for FY12-15. This raises our fair value from S$1.10 to S$1.20. Maintain HOLD.