Suntec – OCBC

Results flat on QoQ basis

Results flat QoQ. Suntec REIT (Suntec) posted a 16.8% YoY and 3.3% QoQ gain in gross revenue to S$63.5m for the quarter ended 31 December. Suntec will pay out 2.858 S cents per unit for the quarter, up 25.4% YoY but flat QoQ, translating to an annualized yield of roughly 17%. We note that Suntec had enjoyed a marginal uptick during the property revaluation completed in the previous quarter. Just three months later, Suntec booked a revaluation deficit of S$328.7m driven by the valuers’ more conservative projection of rental rates.

Achieved office rentals slip, as expected. Office revenue contributed 45% to total gross revenue (ex One Raffles Quay revenue). For the quarter, Suntec City office replacement and renewal leases were secured at an average of S$11.20 psf per month – 11% lower compared to the S$12.57 psf pm achieved in the previous quarter but higher than preceding rents. The REIT will see about 65% of its office portfolio ex ORQ up for renewal in the next two years. We expect achieved rentals to continue softening down to high single digits this year. But the average passing rent at Suntec City Office of around S$6.50 psf pm (our estimate) gives an adequate margin of safety.

Uncertain retail landscape. Retail revenue contributed 55% to total gross revenue (ex ORQ). We expect that like its peers, Suntec will pass on the bulk of the savings from the recently announced property tax rebate to its tenants. Suntec’s manager said the “real test” for retailers will be the post- Christmas and Chinese New Year shopping landscape. The manager said that there isn’t a long queue, so far, looking for renegotiations but it was willing to work out something mutually satisfactory with its tenants. It said the main priority was to maintain occupancy levels. We understand that a typical response would be to restructure the lease (a lower rental today but a longer lease term, etc). We have priced in a 8-10% per annum decline in Suntec City Mall rentals over the next two years.

Refinancing key overhang. Suntec has about S$825m of debt, or about 44% of its total borrowings, up for refinancing in the next 12 months. The manager said Suntec is in the midst of engaging with several financial institutions. This is a lengthy process but the sooner Suntec can clear this overhang, which is weighing down valuations, the better. The REIT is currently leveraged at 0.34x debt-to-assets. Maintain BUY with S$0.90 fair value on valuation grounds.