Smart and prudent approach

At a Glance

• 9M DPU makes up 80% of our full year estimates

• Forward locked in office rents to extend earnings visibility

• Re-rating catalyst from impending AEI works at Suntec Mall and possible divestment of CHIJMES

• Maintain BUY at a lower TP of S$1.53

Comment on Results

Better than expectations. Suntec Reit gross revenue rose 7.4% yoy to S$67.9m in 3Q. However, NPI fell by 5.6% to S$47.8m due to higher property taxes and an enlarged portfolio following the acquisition of 51% stake in Suntec Convention Centre. The decline was offset by a higher contribution from the one-third stake in Marina Bay Financial Phase 1, lifting distributable income by 22% to S$56.4m or DPU of 2.533 Scts. 9M DPU makes up 80% of our full year estimates. Our estimates are tweaked higher to account for the better YTD performance, resulting in a 2-3.5% increase in FY11-12F DPU estimates.

Forward locked in office renewals and impending AEI works at Suntec Mall are positive moves. Office occupancy stabilized at 98% as the group renewed c200,000 sf of office space including UBS’s lease (>100,000sf). This brought down the office leases to be renewed in FY11/12 in terms of NLA from 22% a quarter ago to 13%. We view this strategy to forward lock in tenants as a positive move in view of the global macroeconomic uncertainties. However, renewal rents excluding those leases with rental caps were at an average of S$8.4 per month, slightly below the asking rents in the vicinity. Meanwhile, occupancy for the retail portfolio stood at 97.6%, with vacancies largely coming from Suntec City Mall (96.5%). In our view, this could be due to the planned AEI works at Suntec retail mall. If materialize, this would help unlock the mall’s value in the longer term.

Recommendation

Maintain BUY at a lower TP of S$1.53. Gearing is currently at 40%. We think the divestment of Chijmes would be a re-rating catalyst for the reit as the proceeds could be deploy into better yielding opportunities, as well as strengthen its balance sheet. Maintain BUY with a lower DCF-based TP of S$1.53 as we rolled our numbers forward into FY12 and moderate our rental growth outlook.

Growth despite weaker operating trends

DPU above expectation. Suntec REIT reported 3QFY11 gross revenue of S$67.9m, up 7.4% YoY, due to consolidation of S$7.5m revenue from Suntec Singapore, as the group raised its stake to 60.8% from 20.0% in Aug. Excluding this, gross revenue would be 4.4% lower YoY due to negative rental reversions and lower occupancy rates at Suntec City. NPI, on the other hand, fell by 5.6% YoY on higher operating expenses and absence of property tax provision reversal versus 3QFY10. Nevertheless, distributable income increased by 21.9% YoY to S$56.4m. This was mainly due to the inclusion of MBFC Properties, though partially offset by lower contribution from ORQ. DPU for the quarter stood at 2.533 S cents, up 1.2% YoY and flat QoQ. Together with 1HFY11 DPU of 4.92 S cents, 9M DPU totaled 7.453 S cents. This is above both our and consensus forecasts, which represents 80.1% and 77.6% of our and consensus full-year figures, respectively.

Weaker operating trends. Office portfolio occupancy was weaker at 98.6%, as compared to 99.2% in 2Q. This was mainly dragged down by Suntec City office, which saw its occupancy eased from 99.5% in prior quarter to 98.0%. Leases secured for the quarter, we note, were also lower at an average rent of S$8.41 psf pm (S$9.28 in 2Q). As for its retail portfolio, occupancy also slid slightly from 97.7% in 2Q to 97.3%. More notably, committed average passing rents at Suntec City continued to fall, marking its sixth consecutive quarters of decline since Mar 2010 to S$10.10 psf pm (down c.7.3% over the period). As at 30 Sep, a balance of 12.7% of office and 31.7% of retail leases are due to expire in FY12.

No details on AEI yet. Management had previously mentioned that it may be looking at possible asset enhancement initiatives (AEIs) at Suntec City. However, it has yet to give details on this front. We note that the group’s

gearing ratio was at 39.9%, with an average all-in financing cost of 2.82% and weighted average term to expiry of 2.92 years. While there are no major refinancing requirements till 2013, we believe an AEI, especially a considerable one, may entail a drawdown of more debt. This is in addition to our cautious view that a fast deteriorating macro condition, if it happens, may depress rents and property capital values, hence resulting in higher-than-desirable gearing level. We are currently putting our Hold rating and S$1.59 fair value UNDER REVIEW due to a change in analyst coverage.

Suntec Reit’s Q3 DPU edges up

Beats forecast by 17.9%; income for distribution up 21.9% at $56.4m

SUNTEC Real Estate Investment Trust (Suntec Reit) yesterday posted distribution per unit (DPU) of 2.533 cents for the third quarter ended Sept 30, up 1.2 per cent year on year.

The DPU represented an annualised distribution yield of 8.4 per cent based on the Oct 24 unit price of $1.195.

Income available for distribution was $56.4 million, a 21.9 per cent year-on-year increase from $46.2 million.

According to the manager, ARA Trust Management (Suntec) Limited, 3Q2011 DPU outperformed its forecast by 17.9 per cent. On a year-to-date basis for the nine months ended September, DPU totalled 7.453 cents, exceeding the forecast by 12.4 per cent.

Yeo See Kiat, chief executive officer of the manager, said: ‘I am happy to report that we have once again delivered another quarter of high distribution income. This was achieved on the back of higher income contribution from MBFC properties (comprising Marina Bay Financial Centre Towers 1 and 2, and Marina Bay Link Mall) as well as prudent capital management approach that led to greater interest savings.’

Gross revenue for the quarter stood at $67.9 million, a 7.4 per cent increase over the previous year, mainly due to the consolidation of $7.5 million in revenue from Suntec Singapore.

In August, the trust raised its effective stake in Suntec Singapore from 20.0 per cent to 60.8 per cent.

Net property income for the quarter came in at $47.8 million, a decrease of $2.8 million or 5.6 per cent year-on-year.

For the office portfolio, the committed occupancy of Suntec City Office Towers as at end-September was 98.0 per cent whilst Park Mall office maintained full occupancy.

For the retail portfolio, the committed occupancy of Suntec City Mall was 96.5 per cent, whilst Park Mall and Chijmes achieved 100.0 per cent committed occupancy.

For jointly-controlled entities, One Raffles Quay maintained full committed occupancy, whilst MBFC properties stood at 98.5 per cent.

The overall committed occupancy for the office and retail portfolio stood at 98.6 per cent and 97.3 per cent respectively.

Suntec Reit units closed trading yesterday one cent up at $1.205.

UBS renews Suntec Space lease for 3 years

UBS renews lease at Suntec. UBS is understood to have renewed its lease for about 150,000sf at Suntec Tower 5 for three years. The bank is currently occupying the entire top two floors of the 18-storey Suntec Tower 5, as well as parts of several other floors in the tower, which has net lettable area of 28,000sf per floor. The lease at Suntec was due to expire sometime in the first quarter of next year.

Estimated rents in line with recent transaction for large spaces. Market estimates that UBS could be paying around $7-8psf a month to renew their lease, which is slightly lower than the recent transacted rents at around S$9 psf pm in the area but we think this is in line with the recent transacted and renewal rents for large space at around $6-9 psf pm.

Early lease negotiation, a smart move in view of the upcoming supply. We view Suntec reit’s strategy to forward lock in tenant as a positive move in view of the uncertainty on the global macroeconomic. As at June 2011, the trust has about 74,313sf and 449,023sf of offices leases expiring in FY11 and FY12 respectively. Tying UBS’s lease, which represent 30% of next year’s expiring NLA, will mean that the trust will have a smaller tranche of leases to renew going into next year. We understand from management that they will continue to carry out early negotiations for some of the other tenants progressively. The group proactive efforts in lease management will help to minimize downside risk to Suntec’s occupancy which is currently at a high of 99.5%. Maintain BUY with TP S$1.69.

It makes sense for Suntec Reit to divest Chijmes

BT WEEKEND recently reported that Suntec Real Estate Investment Trust has appointed a property agent to handle an expression of interest exercise for the sale of Chijmes, an iconic conservation development at Victoria Street that houses within it two national monuments.

Whether Suntec actually sells the asset will depend on whether it can make a nice profit from it. The asset was valued at $134 million at the end of last year, higher than the $128 million Suntec paid for it in late 2005.

Back then, Suntec spoke about potential for asset enhancement, synergy with the Reit’s Suntec City Mall and Park Mall, and scope for ‘organic growth’ within the portfolio.

But five to six years on, Suntec could have found it challenging to do all these. After all, there are a lot of restrictions unique to a conservation property. Chijmes Hall (the former CHIJ chapel) and Caldwell House are gazetted national monuments. Suntec would have found it requires a lot of effort on this property, and the returns may not be commensurate.

Back in 2005, Suntec was hungry for assets. It had just bought Park Mall opposite Dhoby Ghaut MRT Station from Wing Tai for $230 million, while another deal to buy 11 properties from City Developments for $788 million was in the midst of coming apart.

Today, Suntec has a much bigger office portfolio, having acquired one-third stakes in One Raffles Quay and Marina Bay Financial Centre (the latter at $1.496 billion late last year). Last month, the trust raised its effective stake in Suntec Singapore International Convention & Exhibition Centre to 60.8 per cent.

Chijmes, a somewhat dated retail and entertainment development, seems less and less important in Suntec Reit’s portfolio. Suntec may not find it worth its while to devote more resources to spruce up the asset, which certainly needs some rejuvenation. But there could be other parties that may find Chijmes appealing.

Despite the current weaker property investment climate among institutional investors such as property funds against the backdrop of global economic uncertainty, there is no dearth of private wealth and sovereign wealth funds (SWF) looking for a place to park their monies, especially in a relatively safer place such as Singapore. Raffles Hotel, diagonally opposite Chijmes, belongs to one such SWF, Qatari Diar.

Who knows, Chijmes could find a new lease of life if part of the space is transformed into a luxury boutique hotel in a charming historic building, taking after the Raffles Hotel on one side and the future luxury hotel coming up on levels two to four of Capitol Building and Stamford House, on the other side. And both are also conserved properties.

More facilities may need to be incorporated and, of course, the permission of the authorities, including the Urban Redevelopment Authority (URA), would have to be secured first.

Some well-heeled educational institutions may also find value in buying Chijmes with the intention of using it as a campus – again assuming URA approves such use for the site. This would return the grounds to their original use and would go well with the presence of Singapore Management University and National Library nearby.

And who knows, a church may end up holding weekend services at the old chapel on the former convent grounds with multimedia link-up to the classrooms.

The prospects for extracting greater value from a historic property such as Chijmes may appeal to many investors. But perhaps Suntec Reit may have set its sights on new acquisitions in the segments of the property market where it has been more successful. The cash and other resources released through the sale of Chijmes could also come in handy against a weakening global economic climate.