Category: Suntec
Suntec – OCBC
Relative value & retail attraction
Office income at turning point. In 3Q09, Suntec REIT reported a decline of 11.4% QoQ and 41.9% YoY in average achieved Suntec City Office rents to S$7.30 per square foot per month. 22.2% of the REIT’s total office NLA (including One Raffles Quay) expires in 2010. Office REITs have yet to feel the full brunt of falling rents because of the time lag created by the three-year leasing cycle. But 2007 leases, which were secured as the market began its meteoric ascent, finally begin to expire in 1Q10. We believe we have approached the inflection point where spot rents are lower than passing rents on expiring leases, impacting revenue and distributions unfavorably.
Potential dilution risk. In 2009, Suntec avoided resorting to a dilutive equity issue to refinance a chunky CMBS maturity. Looking ahead, Suntec could see gearing increase due to a fall in office asset values at the 4Q09 portfolio revaluation. With declining office income and book value risk, Suntec could decide to go the acquisition route in 2010. It is likely to keep aggregate portfolio gearing unchanged or lower, necessitating a combination of both equity and debt financing on any purchase. Assets could be acquired from the original vendors of the Suntec assets, which have (presumably) been de-levering the parent portfolio as seen with the recent Fortune REIT [NOT RATED] transaction and the sale of both the Suntec City Convention Centre and Suntec City’s property manager. Asset yields are unknown -creating potential dilution risk.
Relative value and retail attraction. Suntec has appreciated over 9% since our October upgrade. Current price-to-book of 0.65x compares favorably to the 0.73x averaged in 2006, though the 11% value gap is partially offset by the revaluation risk in 4Q09. We see relative value versus CapitaCommercial Trust [HOLD, S$1.13], which is trading at 0.78x book and 5.4% FY10F yield. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT) but note that CCT’s property valuations are more recent.
We note that Suntec’s strong retail portfolio, which should benefit from the revitalization of the Marina Bay area and the full opening of the new Circle Line, is consistently undervalued. Retail income should also support distributions. We have changed our assumptions, including on the pace and extent of the recovery in office rents from FY12 onwards. Our SOTP value for Suntec increases from S$1.21 to S$1.43. Adjusting for fund-raising risks, we derive a fair value of S$1.40 (prev: S$1.21). Maintain BUY (15.6% total return).
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
Suntec – Daiwa
Net-property income weakens
What has changed?
• Suntec announced its 3Q09 results on 27 October. Net-property income (NPI) of S$47m was 2% below our forecast, but distribution per unit (DPU) of 2.75¢ was 22.5% above our forecast.
Impact
• NPI of S$47m declined by 3.6% QoQ. Gross revenue dipped by 4% QoQ with the major weakness coming from its core Suntec City property. Passing (monthly) rents at Suntec City Mall slipped to S$10.96/sq ft for 3Q09 from S$10.98/sq ft for 2Q09. Meanwhile, the manager signed leases at Suntec City
Office Towers for the quarter at an average of S$7.30/sq ft compared with S$8.42/sq ft for 2Q09 and S$9.96/sq ft for 1Q09.
• Much lower-than-expected net-financing cost was the major positive variance. Suntec’s average all-in financing cost as at 30 September 2009 was 2.88%, almost no adverse impact from the financial crisis.
• We have revised up our DPU forecasts by 9.3% for FY09, 1.3% for FY10 and 0.3% for FY11 after lowering our net financing cost assumptions and our NPI forecasts.
Valuation
• On our revised DPU forecasts, Suntec trades at a 12-month forward yield of 7.6%, one of the most attractive in the sector. We have not changed our six-month target price of S$1.16, based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 6.1% (about 100 basis points above the prevailing cap rate).
Catalysts and action
• We maintain our 3 (Hold) rating for Suntec, in view of the discernible decline in NPI and passing rents and a lingering risk of equity fundraising. We expect Suntec’s fully-diluted NAV to decline from S$1.97 as at 30 September 2009 to S$1.45 by end of 2010 (gearing of 41.2%) and S$1.19 by end of 2011 (gearing of 45.6%).