Suntec – OCBC

Looking oversold

Focus on rentals and capital values. Suntec REIT (Suntec) will see almost 70% of its office portfolio ex One Raffles Quay up for renewal in the next two years. We are projecting Suntec City office rentals will tumble down to single digit next year. We also expect vacancy rates to be on the rise. We estimate the average passing rent at Suntec City Office is currently in the S$6.50 ballpark, comfortably below our fairly bleak reversionary rent expectations for the next two years. On the retail side, we have priced in a conservative 8-10% per annum decline in Suntec City Mall rentals over the next two years. We also feel capital values are at risk, especially for the REIT’s office portfolio. Suntec’s properties were revalued on 30th September, yielding a marginal surplus. According to management, implied cap rates were up 25 basis points (bps) from last year – which still feels a little low to us.

Some refinancing risk. Suntec has about S$825m of debt, or about 40% of its total borrowings, up for refinancing in the next 12 months. Its cost of debt is likely to increase from the last reported all-in cost of 3.2%. The REIT is currently leveraged at 0.32x debt-to-assets. We expect (non-cash) revaluation losses going forwards, which could potentially stress the REIT’s tolerance for gearing. We believe our valuation reflects the risk of an equity recapitalization (which is not necessary, but possible).

Looking oversold. We still think Suntec’s assets are a good long-term bet, and will be net beneficiaries of the revitalization of the Marina area and the completion of the Circle line. We have only two concerns with the REIT: historians will likely label the One Raffles Quay buy in 2007 as overexuberant; and the deferred equity payment structure on the IPO assets creates unnecessary stress on DPU in what are looking to be testing times. Still, our primary focus is on valuations – which are looking oversold. Value hunters have an opportunity to pick up some really good assets on the cheap, in our view. Back of the envelope, the current share price seems to be implying a 48% decline in capital values. We think our concerns have been more than priced in at this point. Our RNAV estimate of S$1.05 prices in a 38% decline in asset values. Our fair value estimate for Suntec is 90 S cents, at a 15% discount to our RNAV estimate. Maintain BUY.