Reward Awaits The Patient Investor for Suntec REIT

2Q13 DPU likely down. Suntec’s 2Q13 DPU is likely to be lackluster, dragged down by Suntec City Mall’s (SCM) ongoing renovation works. We estimate that the largest dip on FY13 DPU will occur in both 1Q & 2Q13, when Phase 1 new tenants have yet to start paying rentals and Phase 2 old tenants are being vacated for the AEI. We noted that many Phase 1 tenants (H&M, Uniqlo, etc.) have begun operations in Jun, but they are likely to be still on rent-free periods (1-2 mths). We forecast 2Q13 DPU at 2.23 SG-cts (flat QoQ; -5.5% YoY) and FY13 DPU at 9.23 SG-cts. (-2% YoY).

Look out for progress update on AEI. Suntec Singapore Convention reopened for business on 3 Jun, with its first event - the Special Olympics Singapore National Games Closing Ceremony. So far, it has also hosted the APASL Liver Week, Singapore Book Fair, Ad: Tech, JEC Asia etc. It also unveiled the largest HD LED screen in the world, named “the Big Picture”, standing three storeys high and 60 meters wide. Pre-commitments for Suntec City Mall’s (SCM) Phase 1 post-AEI leases hit 96.7% in 1Q13 and we believe most were secured above the targeted SGD12.59 psf/mth. Looking at the progress of new Phase 1 tenants moving in, we think pre-commitments should hit at least 98% in 2Q13. Suntec also reported that 53% of Phase 2 NLA has been precommitted in 1Q13. We noted that Phase 2 AEI for SCM has commenced and the intensity of the refurbishment works could mean that overall AEI works should wrap up as scheduled by 4Q14.

Optimistic on SCM Rental Uplift. We maintain our estimate that the average passing rents for SCM post-AEI may be secured at SGD13.50 psf/mth. We think this is still conservative, given that passing rents at nearby Raffles City Mall are contracted at ~SGD18-19 psf/mth. We also believe that the South Beach development and the SGD95m Marina Square expansion (first phase of 50k sqft gourmet precinct and second phase of 200k retail wing) will further add vibrancy to the Marina area.

DPU top-up likely in 2Q13. Suntec received cash proceeds of ~SGD147m from the sale of Chijmes in 1Q12. So far, it has topped-up SGD2.7m in 1Q13 and we do not rule out another top-up in 2Q13, as 1Q13/2Q13 will witness the largest occupancy dip. We also estimate that a 50bps increase in the cost of borrowing could have a 3% impact on DPU. Nonetheless, trading at 0.76x P/B, we think that market has already priced in the forward negatives from rising borrowing costs, with the SG risk-free rate rising 99bps since Bernanke’s congressional testimony on 22 May (Notwithstanding Sibor 3M has remained flat). We raise our risk-free rate to 3% from 1.5% previously. Reiterate BUY with reduced TP of SGD1.75.