Suntec REIT

Suntec REIT does not fully own Suntec City. 

59% interest in Suntec City Office Towers, 

100% stake in Suntec City mall 

60.8% ownership in Suntec Singapore Convention and Exhibition Centre.

Company News

Ascott Residence Trust’s 4Q14 DPU of 2.16 Scts (+13% y-o-y on normalised basis), in line with expectations. Uplift in DPU was driven by AEI’s and acquisitions. The solid growth outlook is underpinned by full contribution from 2014 acquisitions. Maintain BUY, TP revised lower to S$1.37 (Prev S$ 1.40), owing to a slight reduction in our earnings forecasts.

Soilbuild Business Space REIT’s 4Q14 DPU of 1.585 Scts in line. Gross revenues and net property income came in at 8.3% and 9.0% higher y-o-y at S$17.7m and S$14.9m respectively. Performance was largely driven by acquistions of two industrial properties in 4Q14, and positive rental reversions. Going forward, rental renewal growth is expected to moderate; acquisitions to complement growth. Maintain BUY, TP S$0.92.

4Q14 results for Suntec REIT in line. Suntec City Mall is 91.3% leased on an enlarged basis; blended rent of S$12.27 is lower than expected. Office leasing momentum is

Suntec REIT to benefit from positive office momentum

NAV per share (S cents) FY14 = 212.1

The momentum for prime office space in Singapore remains robust, as illustrated by the 3.3% QoQ and 14.7% YoY increase in Grade A rentals in 3Q14, based on data from CBRE. We expect Suntec REIT to be a beneficiary of this trend, as approximately 69% and 68% of its NPI and NLA are contributed by the office segment, respectively. Notwithstanding this positive environment, we believe the pace of rental increase would moderate next year. Growth is expected to ease further in 2016, given the large pipeline of supply coming on stream (~3.9m sq ft). Market watcher Knight Frank has projected a 6%-7% YoY rise in rental rates for prime office space by 4Q15, before softening to overall rental growth of less than 6% per annum in 2016 and 2017.

But retail headwinds pose challenges
The situation appears less sanguine for Suntec REIT’s retail segment, in our view, underpinned by headwinds facing Singapore’s retail sector. This has resulted in the relatively lacklustre committed occupancy rate of 60% (as at 30 Sep 2014) for Suntec City Mall’s Phase 3 development. We see downside risks to our FY15 gross revenue and DPU forecasts if the situation remains sluggish.

Share price performed well; downgrade to HOLD
Suntec REIT’s share price has appreciated 26.0% YTD, outperforming the STI and FTSE ST REIT Index by 21.0 ppt and 17.3 ppt, respectively. We believe the potential for further yield compression could be limited at this juncture, as the stock is now trading at FY14F and FY15F distribution yield of 4.8% and 5.6%. The latter is close to one standard deviation below its 5-year average forward yield of 6.2%. In terms of yield spread over the Singapore Government 10- year bond, the current value of 3.4% is 0.8 ppt below the 5-year average of 4.2%. Given the aforementioned factors, we downgrade Suntec REIT to HOLD, with an unchanged fair value estimate of S$1.90.

Suntec REIT top pick of most analysts

John Lim Hwee Chiang bought his first million shares in Suntec REIT ($1.63, up 4 cents) at $1.59 each. This will likely boost confidence in the stock which is currently amongst the top pick of most analysts who cover the REIT sector, reflecting positive effect from their asset enhancement initiatives (done in the past 2 years) over the next few years. Consensus expects 2014 and 2015 dividend to be boosted by 10-11% to 10 cents and 11 cents respectively, giving a forward and prospective yield of 6.1% and 6.7% respectively. We would accumulate the stock on price weakness.

Suntec continues to deliver

Results in line with expectations
Following the massive SGD410m AEI on Suntec City, Suntec’s FY13 revenue contracted by a modest 10.6% YoY to SGD234m, forming 96.5% of our and 98% of consensus estimates. Full-year DPU declined 1.7% YoY to 9.328 SGD cts, constituting 101% of our and 102.5% of consensus forecasts. The amount included a top-up of 0.839 SGD cts (total SGD19m) from the sales proceeds of CHIJMES for capital distribution. Stripping out the top-up, FY13 DPU would have been 8.489 SGD cts (-10.5% YoY). Aggregate leverage inched up to 39.1% from 38.6% last quarter following new borrowings. Net financing costs for FY13 averaged 2.5% with an average term of 2.44 years.

AEI making good progress
Committed occupancy for Phase 1 leases hit 99.6% with average passing rent of

Suntec REIT - Foray into overseas market

Proposed acquisition of landmark office tower
Suntec REIT announced last Fri that it is seeking to acquire a 100% interest in 177-199 Pacific Highway for A$413.19m (~S$483.4m), confirming the 14 Nov news by The Australian on the potential acquisition. The property is a 31-storey, Grade A freehold office tower under development and is located in one of the most prominent sites in North Sydney CBD, Australia. The tower, estimated to have 423,915 sqft NLA, is slated for completion in early 2016, and will be well-served by both major roadways and public transport.

Purchase to be earnings accretive While we are surprised by the timing of the acquisition and Suntec REIT’s move into the overseas market, we see several positives in the investment. First, the transaction is expected to be earning accretive, as Suntec REIT will receive coupon payments at a yield of 6.32% p.a. on the progressive payments made during the construction, and a NPI yield of 6.89% upon completion of the property (adding ~0.45 S cents to DPU). Hence, this may reduce/eliminate the need to dip into CHIJMES sales proceeds to mitigate the temporary decline in DPU due to Suntec City asset enhancement. Second, the property is 100% pre-committed with the Leighton Group (Australia’s leading contractor and property development group) taking a head lease of 76% of the NLA for an average lease term of ~10 years. In addition, Leighton Holdings will provide a

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.

Suntec REIT AEIs works are on track

+ Suntec REIT reported 1Q ‘13 distributable income of S$50.3mil (inclusive of capital return amounting to S$2.7 million), down 8.4% y-o-y. 1Q ‘13 Distribution per unit (DPU) also came in at 2.228 cents, compared to 2.453 cents in same period last year. Overall, the annualized distribution yield stood at 4.7%. 

+ The declines in distributable income and DPU for 1Q ‘13 were mainly due to the partial closure of Suntec City Mall and Suntec Singapore for asset enhancement initiatives (AEIs), which had already been flagged out to the market. 

+ Its aggregate leverage ratio stood at 38.6%, whilst portfolio occupancy came in strong at 99.7% for its office assets and 99.4% for its retail portfolio. 

Suntec REIT positioning well for growth

Fair value S$1.94


• 4Q12 DPU exceeded expectations
• Office segment stayed resilient
• Good progress on Suntec City AEI

4Q12 DPU above expectations
Suntec REIT posted an encouraging set of 4Q12 results last evening. Despite registering a 41.3% YoY decline in NPI to S$30.6m, DPU for the quarter came in at 2.326 S cents, down only 6.2%. This brings the FY12 to 9.49 S cents (-4.5%), ahead of our full year DPU forecast of 9.28 S cents (consensus: 9.4 S cents). Notably, no proceeds from the divestment of Chijmes were needed to achieve the quarterly performance, which in our view reflects the strong execution by management.

Office segment continues to perform
The drop in 4Q NPI was mainly attributable to the closure of Suntec Singapore in Oct 2012 and Suntec City Mall (Phase 1) in Jun for the asset enhancement works (AEI) and the sales of Chijmes. In particular, Suntec Singapore saw a loss of S$10.9m vs. S$5.8m in 4Q11. However, the office segment continued to perform, raking up 11.1% growth in revenue amid positive rental reversions and consistently high occupancy of 99.7% (99.9% in 3Q). This helped to cushion the softness at its retail segment, which experienced a

Sun shines brighter at Suntec REIT

Target price: SGD1.66



DPU top-up unlikely in 3Q12. As a result of Phase 1 AEI work, which started in Jun 2012, we expect revenue from Suntec Mall to slide from SGD103m in FY11 to SGD86m (16% decline) in FY12F. Occupancy rate is likely to fall to 75-78% by year-end (excluding the space vacated by Carrefour). Carrefour takes up some 137k sq ft of NLA and will likely depress occupancy rate to ~60% when its lease tenure expires 31 Dec 2012. Nonetheless, we are confident that Suntec REIT should be able to pay out DPU of at least 2.15 Singapore cents for 3Q12 and at least 9.0 Singapore cents for the full year. We also do not think that Suntec will use its Chijmes divestment proceeds to top up its 3Q12 DPU. It may want to keep this flexibility for 4Q12 when there is greater clarity on its full-year distributable income.

AEI making good progress. From our observation, refurbishment works have been progressing well, with Suntec Convention and the Galleria/Fountain Terrace zones proceeding full steam ahead. Food Republic has ceased operations and tenants at Fountain Food Terrace are expected to vacate by end Oct. We think pre-commitments for Phase 1 leases should hit at least 65% presently and Phase 2 AEI should commence on time by Apr-May 2013. We estimate that the largest dip in mall occupancy should occur in FY13F at ~59%, but this will improve in FY14F to ~70%.

Office portfolio in good shape. Against a background of office supply glut (Pipeline supply of 24% of available Downtown Core stock by

Suntec REIT trades at 0.7x FY12F book

+ Suntec REIT recently announced that it has successfully converted the vehicle which holds Marina Bay Financial Centre Phase 1 (MBFC1) from a private limited to a LLP (limited liability partnership) structure, which grants it tax transparent status.

+ Based on our estimates, Suntec will enjoy tax savings of SGD2.8-5.2m for FY12-15F, adding 0.8-1.5% to our forecasted DPU. We understand that the restructuring of One Raffles Quay (ORQ) into a similar tax-efficient LLP structure may not happen in the near term and has not factored this into our estimates (estimate boost of another SGD1.7-3.3m if allowed).

+ After factoring in the tax savings, our target price for Suntec goes up by ~6% to SGD1.37. The stock currently trades at 0.7x FY12F book and 7% FY12F yield. Downside risks include worse-than-expected average rentals for SCM and concentration risk on Suntec City. Reiterate HOLD.

Suntec REIT Unitholders to enjoy higher DPU

MBFC properties holding company obtains LLP status
Suntec REIT announced last Friday that BFC Development Pte Ltd (BFCD PL), which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership with the name BFC Development LLP (BFCD LLP). Suntec REIT had held one-third interest in BFCD PL. Following the conversion, the REIT now holds one-third interest in BFCD LLP as a partner.

Positive impact from the conversion
As a limited liability partnership is tax transparent for Singapore tax purposes, this means that Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward (adjustments are not retrospective). This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We understand that dividend income (cash flow) and share of profits will benefit from the conversion, whereas income tax for income support will still be ongoing. Based on our estimates, FY12-13F DPU may get a boost of

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

Suntec REIT’s aggregate leverage was at 39.1%

Suntec REIT:
fair value now drops from S$1.59 to S$1.10.

Stock appears fairly priced
● 4QFY11 results above estimates
● Stepping up proactive leasing strategy
● Suntec City AEI to start in Jun

4QFY11 results exceeded expectations.
Suntec REIT reported 4QFY11 NPI of S$52.0m and distributable income of