Suntec – OCBC

Lower retail revenue eats into 4Q10 results

4Q10 DPU of 2.316 S-cents. Suntec REIT’s 4Q10 gross revenue of S$61.41m fell 0.56% YoY and 2.9% QoQ. NPI was stagnant YoY but dropped 6.7% QoQ to S$47.2m. Office revenue contributed 47% of total 4Q10 gross revenue, while retail revenue constituted the rest. Gross office revenue was S$28.7m, comprising Suntec City office revenue of S$26.8m and Park Mall’s S$1.9m. Gross retail revenue was S$32.7m, comprising Suntec City retail revenue of S$26.8 and revenue from Park Mall and Chijmes of S$5.9 m. Distributable income declined 6% YoY and 2.8% QoQ to S$44.9m, amounting to a 4Q10 DPU of 2.316 S-cents. The declines were mainly due to lower retail revenue achieved for the quarter, which fell 0.9% YoY and 1.5% QoQ, reaffirming our initial concerns about the looming retail slide for Suntec properties, following the ‘rejuvenation of Orchard Road’ 1. Chijmes, Park Mall and Suntec City Mall all saw a drop in revenue of 11.8%, 6.5% and 1.5% QoQ respectively. The income contribution from One Raffles Quay (ORQ) also saw a decline because of lower income support and lower interest income, following the repayment of the ORQPL shareholder’s loan.

Portfolio Performance. Following the MBFC1 acquisition, which was completed on 9 Dec, Suntec has surpassed CCT as Singapore’s 2nd largest REIT, with total assets of S$6.7b. As of 31 Dec, its aggregate leverage stands at 40.4%, with total debt of S$2.58b and weighted average debt term-to-expiry of 3.3 years. Office portfolio occupancy rose to 98.8% from 96.8% a year ago. However, retail portfolio occupancy declined marginally by 0.1 pp to 98.0%.

Maintain HOLD. We are overall positive on the office sector recovery, and confident of the manager’s expectation that negative rental reversions for Suntec’s office portfolio will bottom out by end 2011. However, we continue to have lingering concerns about Suntec’s retail portfolio, given that we do not expect retail rents to pick up as much as office rents, and there may be more “hollowing out” of shoppers’ traffic (precluding its immediate office catchment and traffic from large convention shows, such as the IT Show, PC Show etc.) to Orchard road or even suburban malls, if there is no further traffic boost to Suntec properties. In addition, 25.5% of retail portfolio NLA is expiring in 2011, followed by 30.3% in 2012 and 27% in 2013. We still think that the MBFC1 acquisition will help to boost the proportion of office to retail mix for Suntec, and help mitigate some of the top-line effects of thinning retail traffic, but this is, nonetheless, still a temporary fix. Maintain HOLD with a revised fair value of S$1.60.