Category: Suntec
Suntec – UOBKH
Benefitting From Improved Connectivity To Suntec City
Suntec REIT invests in income-producing real estate used for retail and/or office purposes. Its initial portfolio comprises Suntec City Mall and Suntec City Office Towers, which are linked to the Suntec Singapore International Convention and Exhibition Centre. The two properties are within walking distance from the City Hall MRT station. Suntec REIT subsequently acquired Park Mall next to Dhoby Ghaut MRT station in Oct 05 and niche retail and dining establishment Chijmes in Dec 05. Suntec REIT’s family rating is Baa1 from Moody’s Investor Service.
Quality of portfolio enhanced by improved connectivity. Singapore Tourism Board has set up a S$170m incentive scheme to support business events and has embarked on a three-year global marketing campaign to showcase Singapore as a MICE (meetings, incentive travel, conventions and exhibitions) destination. Suntec City Mall will benefit from increased shopper traffic due to its proximity to Suntec Singapore International Convention and Exhibition Centre. Accessibility to Suntec City will also improve as Suntec City will be served by the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010.
Benefitting from positive rental reversion for office space. Suntec City Office Towers and Park Mall recorded average passing rentals of S$5.30 and S$4.70psf pm in 1QFY08, affected by leases signed in FY05 and FY06. We expect average passing rentals to revert to S$10 and S$8 psf pm for Suntec City Office Towers and Park Mall respectively by FY10. Suntec REIT raised S$173.2m through a placement of 120m new shares at S$1.50 in Oct 06. It has acquired a total of 54,040sf of additional office space at Suntec City for S$102.3m by using proceeds from the placement.
Upgrade to BUY from HOLD. We like Suntec REIT for its balanced portfolio of quality retail and office properties. It provides FY08 distribution yield of 6.1%, an attractive spread of 3.7% over the 10-year Singapore government bond yield at 2.4%. Our target price is S$2.18 based on the two-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).
SREIT – DB
Exuberance fades, value endures
Attractive valuations; deep discounts to NAV unsustainable medium term
Recent 4Q results show still firm organic rental growth and resilient income, which should shift focus from slowing acquisitions. With a few exceptions, balance sheets are sound and refinancing risk manageable. Following a 30% decline since mid 2007, 3/4 of the REITs are trading below book (which could drive M&A or capital mgt) and we find valuations compelling at an avg FY08 yield of 6.4% (a 400bps spread above the 10-year gov bond), a level not seen since mid-2003.
Acquisitions not the only DPU growth driver; organic growth still firm
While weak equity markets have made the acquisition growth model difficult, organic growth remains intact as reflected by robust DPU growth in the recent quarter. Passing office rents still lag market rents, retail rents continue to firm, and industrial rents are 40% below the peak. Cash flows are defensive with secured leases (min 3 years) and rental deposits (in the event of tenant default).
Balance sheets resilient, refinancing risk manageable
Average gearing for the sector is 30% with a few exceptions such as K-REIT, MLT, and Allco which have above-average gearing. Refinancing costs have not risen substantially despite weak credit markets as a significant widening of spreads has been offset by 30-110bp decline in swap offer rates. Most REITs can sustain more than 15% decline in asset values without breaching the statutory gearing limit.
NAV discounts unsustainable once capital markets stabilise
Equity issuance is likely to be moderate until discounts to NAV narrow, and M&A or value unlocking exercises (REITs have started share buy backs) could help narrow discounts to NAV. Similar to Australia and US, SREITs could be takeover targets if discounts remain. Private equity real estate funds raised US$79bn last year with a US$21.6bn focusing on Asia/ROW. Despite the uncertainty, two S$0.8- 1bn physical market transactions have been completed in the last month.
Valuations attractive – transparency, strong balance sheets a premium
The SREIT index has declined by nearly 30% since June 07, underperforming both the STI and the developers. Valuations are generally attractive at 5.5% FY07 and 6.4% FY08 yield representing a 400bps FY08 spread on the LT bond and 12% average discount to NAV. Amid uncertainty over acquisition growth, we focus on REITs with stronger organic growth profiles and/or discounts to NAV, with transparent structures and sound balance sheets without funding risk. REITs which have mismatch in overseas assets and S$ denominated liabilities may face NAV erosion given the appreciation in the S$.
Top picks for REIT sector – CapitaMall Trust, A-REIT and Suntec REIT
We continue to recommend CMT for its strong retail franchise and its track record in extracting value from assets through asset enhancements (even during SARs), A-REIT for its leverage on the rising business & science park and hi-tech industrial segments and Suntec REIT for a high yield and discounts to NAV. Risks: protracted economic slowdown affecting leasing demand, further deterioration in credit markets and the inability to refinance.
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Suntec – BNP
1QFY08 preview and outlook
We expect 1QFY08 net property income of SGD44.8m, up 29% y-y, arising from positive rental renewals and maiden contributions from ORQ. The acquisition of ORQ is mildly yield accretive given its fixed-lease structure until FY11. The stock now trades at an FY08E yield of 6.2%, 390bp above 10-year government bond yields. Maintain BUY; TP of SGD2.39.
Expect robust 1QFY08 earnings growth
Suntec is scheduled to report 1QFY08 results on 30 January. We expect revenue and net property income of SGD60.5m (up 31.7% y-y, 18.5% q-q) and SGD44.8m (up 29.0% y-y, 22.4% q-q). The strong performance is likely to be driven by good organic growth arising from positive rental renewals from Suntec City and maiden contributions from One Raffles Quay (ORQ).
Considerable yield accretion for ORQ beyond FY11
Based on our estimated SGD8.80/sqft assumption, ORQ is forecast to offer a net property income (NPI) yield of 4.2%, in turn contributing 14% of the group’s rental income. Due to its fixed-lease structure, ORQ should be mildly yield accretive between FY08 and FY11. Assuming calling rents remain at the current SGD15-18/sqft, we expect considerable rental reversionary growth when leases for ORQ are due for renewal in FY11.
Strata buyback programme gaining some traction
The acquisition programme to buy back more Suntec strata office units has started gaining traction. Last month, Suntec REIT acquired about 28,000 sqft of Suntec City office space at an NPI yield of 5%. Nevertheless, we continue to foresee elevated headwinds in its acquisition programme as there is an increasing number of Suntec strata proprietors seeking prices above the SGD2,500/sqft level. This comes in the shadow of their lock-in of gross rents below the SGD12.50/sqft per month level, which otherwise offers the REIT an NPI yield of 5%.
Ample debt capacity to expand portfolio by 26%
With the acquisition of ORQ, Suntec REIT has a gearing of 32%. This gives it a debt capacity of SGD1.45b, assuming a target gearing of 45%. We have factored in an annual buyback of 50,000 sqft of strata office space between FY08 and FY12 at an NPI yield of 5%. Exhibit 3 illustrates the different share-placement levels at varying yields, which is required for Suntec REIT to achieve accretion to its DPU.
BUY, with TP of SGD2.39
We maintain our BUY rating and a target price of SGD2.39. Prospects for Suntec REIT to expand organically remain strong considering 70% of its office portfolio leases are due for expiry in FY08-09. The stock now trades at an FY08E yield of 6.2%, 380bp above government bond yields.
Office REITs – UOBKH
Continued interest from foreign investors
Germany-based Commerz Grundbesitz Investmentgesellschaft has bought 78 Shenton Way for S$650m or S$1,857psf from a JV between Credit Suisse and CLSA Funds. The property comprises an existing 34-storey office tower with 275,000sf and a 6-storey extension with 75,000sf. The extension is currently under construction and is scheduled for completion in 2H09.
The purchase price is comparable to recent transactions in the vicinity. German pension fund SEB bought SIA Building (renamed Robinson 77) earlier this year for S$1,780psf. SEB also bought 12 floors of office space at Springleaf Tower in the Anson Road area for S$2,088psf.
There is limited supply of office space coming on stream over the next two years (2008 and 2009). We expect to see buying interest for office REITs, such as KREIT, Suntec REIT and CapitalCommercial, given recent steep correction.
Continued interest from foreign interest will also booster share price.
Suntec – BT
Suntec Reit
Nov 30 close: $1.55
BNP PARIBAS RESEARCH, Nov 29
SUNTEC Reit has tumbled 14 per cent over past month: The share price of Suntec Reit has tumbled 14 per cent since the end of October, in line with the steep correction in the Straits Times Index (STI). We believe concerns over prior yield compression and the narrowed spread against risk-free instruments have been overstated.
To ascertain if this sell-down has been overdone, we used the dividend yield spread (over 10-year government bond yields) highs recorded during the June 2006 correction to determine the floor price of Suntec Reit. At current valuations, we think Suntec Reit has been oversold.
Trading at oversold levels: Suntec now trades at an FY08 yield of 6 per cent (up from 5.1 per cent as of Nov 1), or 307bp above the 10-year risk-free rate. This compares favourably against the previous peak (on June 15, 2006), where the stock traded at a yield spread high of 291bp and 223bp at IPO (in December 2004).
Benchmarking against a yield spread of 291bp, our estimated floor price is $1.62. From a required returns perspective, we think the stock has overshot its floor price by 2.5 per cent. Premising on a yield spread of 223bp, the floor price would have been $1.84, offering a 16.4 per cent upside to its floor price.
No downward pressure from US FFR on Singapore rates: Our US counterparts anticipate a further 25bp reduction in the Fed fund rate in December, following October’s 25bp cut. We, however, do not foresee any changes in Singapore’s risk-free rate. There is no statistical correlation between Singapore’s 10-year risk-free yields and the US FFR. This cements our view that any expansionary monetary policy measures by the US Fed is not likely to broaden the spread between S-Reit yields and the risk-free rate.
Time to say good BUY; TP of $2.39: We maintain our BUY rating and a target price of $2.39. Prospects for Suntec Reit to expand organically remain strong considering that 70 per cent of its office portfolio leases are due for expiry in FY08-09.
The stock currently trades at a 28 per cent discount to its NAV of $2.20. Offering a prospective yield of 6 per cent, we believe the stock now trades at oversold levels, which provides investors a good level for entry.
BUY