Suntec REIT

Suntec REIT: 1QFY15 results fell short of estimates, with DPU of 2.23¢ (flat y/y, -13.6% q/q). Adjusting for its private placement of 218.1m shares last year, DPU should have been up 6%.

Gross revenue was $74.5m (+12.9% y/y, -3.1% q/q), taking NPI to $51.4m (+17.3, -3.1% q/q), mainly due to the opening of Suntec City mall (Phase 2) following the completion of the asset enhancement works and stronger performance from Suntec Singapore.

Office occupancy eased to 99.6% from 100% in 4Q14, while retail occupancy dropped to 93.5% from 99.7%, with Phase 3 of AEI at Suntec City receiving TOP in Feb ’15 and tenants gradually moving in.

Stabilised passing rents for Suntec City is now at $12.15 psf, lower than the $12.27 in Dec ’14, although management is guiding that the rest of the space on level 1 should command better rents. Shopper traffic is also improving and is not far from pre-AEI levels.

Aggregate leverage stood at 34.8%, with slightly higher all-in interest cost of 2.53%, lower average debt tenor of 3.39 years (4Q14: 3.63 years) and no refinancing needs in 2015

Notwithstanding the resilient office leasing environment, management is flagging a more challenging outlook for retail space amid a labour crunch and peaking rentals. Downside risks would include disappointment over rental and occupancy rates at Phase 3 of Suntec City mall and concerns about the looming supply of office space expected in 2016.

Valuations for Suntec REIT are fairly rich with forward DPU yield compressed to 5.4% and P/B at 0.9x.

Latest broker ratings:
Maybank-KE maintains Hold, cuts TP to $1.89 from $1.94
Daiwa maintains Hold with TP of $1.88
CLSA maintains Sell with TP of $1.80
Deutsche maintains Sell with TP of $1.73