Mixed outlook

• 4Q14 DPU marginally up by 0.6% YoY
  
• Office segment outperforming retail
  
• Valuations unexciting
  

4Q14 results within expectations

Suntec REIT reported 4Q14 revenue of S$76.8m, an increase of 7.3% YoY. This was largely due to the opening of Suntec Singapore, completion of Phase 2 of the AEI at Suntec City mall and stronger contribution from its office segment. DPU was up marginally by 0.6% to 2.577 S cents and was in-line with our expectations. For FY14, revenue rose 20.6% to S$282.4m, or 2.4% above our forecast. DPU of 9.4 S cents translated into a growth of 0.8% and formed 100.9% of our FY14 projection.

Leasing progress for Phase 3 of Suntec City mall still muted

Management updated us that the committed occupancy for Phase 3 of Suntec City mall’s AEI came in slightly above 70% as at end FY14, as compared to 60% in 3Q14. This is a concern to us as TOP is expected to happen soon. We believe progress has been hampered by the tough leasing environment due to retail sector headwinds. Overall committed occupancy for all phases of the Suntec City AEI was 91.3%, with a committed passing rent of S$12.27 psf pm. On the other hand, Suntec REIT’s office segment continued to drive its growth, clocking in a committed occupancy rate of 100%. Average rental rates of S$8.92 psf pm were secured for leases signed in 4Q14, a healthy level, in our view, as Suntec REIT is still delivering positive rental reversions for its new office leases. Outlook for its office segment remains robust in 2015.

Maintain HOLD

We lower our FY15 DPU forecast by 5.9% and introduce our FY16 estimates. As we roll forward our valuations, our fair value estimate is lowered from S$1.90 to S$1.86. With a forecasted FY15F distribution yield of 5.1%, we believe valuations do not excite, as this is close to 1.5 standard deviations below Suntec REIT’s 5-year average forward yield of 6.2%. We thus maintain our HOLD rating on the stock.

Gaining strong traction

• 2Q14 DPU up 0.8% YoY
  
• Good progress on leasing efforts
  
• Expecting stronger performance
  

2Q14 results within expectations

Suntec REIT turned in a strong set of 2Q14 results, with NPI and distributable income rising 64.9% and 19.8% YoY to S$46.1m and S$51.6m respectively. The better performance was due to the opening of Suntec Singapore following the completion of Phase 1 asset enhancement initiative (AEI), and was achieved despite the concurrent closure of Phases 2 and 3 during the quarter. DPU came in marginally higher (+0.8% YoY) at 2.266 S cents. However, we note that only S$5.0m capital distribution was made in 2Q, as opposed to S$7.8m a year ago. Excluding the capital payout, DPU would have risen 8.5% YoY. For 1H14, DPU totalled 4.495 S cents, up 0.4% YoY. This constitutes 46.3% of our FY14F DPU, in line with our expectation.

Robust operational performance

Suntec REIT’s office segment continued to gain traction in 2Q, raking 4.7% growth in revenue on the back of positive rental reversions. The Suntec City Office occupancy also inched up 0.5ppt QoQ to 99.4%, while leases secured averaged S$8.98 psf pm versus S$8.97 in 1Q. Management disclosed that it has forward renewed ~94,000sqft of office leases expiring in 2014, leaving only a balance 5.6% of leases due for renewal in 2014. On the retail segment, we note that revenue also improved 19.1% YoY due to the opening of Suntec City Phase 1 retail space. Suntec REIT shared that Phase 2 has opened on 1 Jun, and that the aggregate committed occupancy and passing rent for Phases 1 and 2 stood at 97.6% and S$12.57 psf pm (1Q: S$12.59) respectively. While management is keeping mum on the marketing progress for Phase 3 retail space, it disclosed that it is targeting an entirely new tenant mix such as “accessible luxury brands”.

Maintain BUY

Looking ahead, Suntec REIT remains positive on its office portfolio performance. It also reiterated that the remaking of Suntec City is on track for completion by end-2014, and that the ROI projection of 10.1% remains

intact. We now tweak our assumptions to factor in stronger performance upon completion of Suntec City AEI. Consequently, our fair value is raised to S$1.96 from S$1.85 previously. Maintain BUY.

Looking forward to Phase 3

SUN’s 2Q14 results were in line with expectations, with 2Q DPU accounting for 25% and 1H14 forming 50% of our full-year forecasts. Though no details were revealed for Phase 3 of the AEI, which is scheduled to be completed in 4Q14, we remain confident of the company’s outlook. As the stock is trading at 5.6% FY15 yield vs. the average of 5.9% for its peers, we believe that SUN is fairly valued. As such, we downgrade it to Hold from Add with a slightly higher DDM-based (discount rate: 8.0%) target price. Our FY14-16 estimates rise by 1.5-2.0% as we fine-tune our occupancy and passing rent assumptions.

Results in line

2Q14 results were in line with our estimates, with revenue and distributable income accounting for 24% and 25% of our full-year estimates respectively. During this quarter, approximately 0.2Scts was distributed – an action within expectations as Phase 2 of Suntec City AEI contributed to the earnings for less than one month while Phase 3 was closed for renovation. As a result, 2Q14 DPU was largely flat (+0.8%) yoy.

No details for Phase 3 AEI

The portfolio remained stable with the occupancy rate for the Suntec office at 99.4% while the combined occupancy of Phase 1 and 2 of Suntec City AEI was reported at 97.6%, indicating that Phase 2 occupancy remained unchanged qoq. Although no further details were revealed on the occupancy of Phase 3, citing leasing activities as being still underway, the management guided that a clearer picture will be available in 3Q14. The passing rent for Phase 1 and 2 remained strong, at S$12.57 psf/month.

Downgrade to Hold

Assuming an overall occupancy rate of 95% and a passing rent of S$13.00 psf/mth, we have raised our earnings estimates for FY14-16 by 1.5-2.0%. Based on past history, we remain confident that the management will deliver Phase 3 with good commitment rates and higher rental rates than Phase 2 (c.S$12.15 psf/mth). However, with SUN currently offering an FY15 yield of 5.6%, compared to 6.0% and 5.8% for the office and retail REITs respectively, we are of the view that SUN is fairly valued. Hence, we downgrade the stock to Hold.

The signs of strength

SUN kept its DPU unchanged yoy at 2.2 cts (25% of our full-year forecast) in 1Q14 despite strong revenue growth of 32.8% yoy. The strong growth, which was in line with our estimate, came mainly from the opening of Suntec Singapore following the completion of Phase 1 of the AEI. We stress that the DPU being paid comes entirely from organic contribution, i.e. there is no dipping into the capital pool. We maintain our Add rating with an unchanged

DDM-based (discount rate: 8.0%) target price of S$1.83 on the back of further income contribution from the upcoming Phase 2 of AEI at Suntec City.

Phase 2 of Suntec AEI

Phase 2 of the AEI (scheduled to open before the end of 2Q14) registered a strong 95.0% pre-committed occupancy as at 31 March though we speculate that it is closer to full occupancy at the moment. During the results briefing, management indicated that the AEI remains on track for a 10.1% ROI, securing an average rental rate of S$12.69 psf/mth for Phases 1 and 2. Based on our calculations, this translates into an average passing rent of c.S$12.15 psf/mth for Phase 2, a level which we deem fair given that the majority of Phase 2 tenants are non-fashion tenants who usually pay lower rental rates.

No financing requirements until 2016

In terms of its financing needs, SUN has fully refinanced all the debts in FY14 and FY15 via a recently secured S$800m, 5-year loan facility together with the proceeds from the recent S$350m placement. With no further risks in financing, together with a low all-in financing cost of 2.49% and 65% of total debt subject to a fixed rate, we believe that SUN is well-shielded from any upcoming hike in interest rates. Furthermore, barring any future potential acquisitions, we believe that capital raising is unlikely.

Maintain Add on bright prospects

Looking ahead, Phase 2 AEI will begin to contribute in 3Q14. Marketing for Phase 3 (scheduled to complete in 4Q14) has also commenced and, based on our background checks, is relatively well received by potential tenants. In addition, with further room for positive rental reversion in its office portfolio, coupled with the commencement of coupon payment from Leighton Tower, we maintain an Add rating with an unchanged target price of S$1.83.

Pure operational boost in 1Q14

• 1Q14 DPU steady at 2.229 S cents
  
• Strong execution on leasing activities
  
• Refinancing needs in 2014-15 addressed
  

Encouraging set of 1Q14 results

Suntec REIT posted a strong recovery in its 1Q14 results, with NPI and distributable income rising 42.7% and 7.0% YoY to S$43.8m and S$50.9m respectively. The increase was due mainly to the opening of Suntec City Phase 1 and a S$1.9m contribution from its recent acquisition in Sydney. DPU was flat YoY at 2.229 S cents. However, we note that no capital distribution was made in 1Q14, as compared to S$2.7m a year ago. Excluding the capital distribution, DPU would have been up 5.7%. We judge the results to be within expectations, as the DPU constitutes ~24% of ours and consensus FY14F DPU.

Leasing activities progressing well

Suntec REIT continued to make significant progress on its lease management. Within the office segment, over 100,000sqft of leases due to expire in 2014 was renewed, leaving only 9.6% of office space due for expiry for the rest of the year. Notably, average secured rents at Suntec City office continued to trend upwards to reach S$8.97 psf pm (4Q13: S$8.65). At Suntec City retail component, management also disclosed that Phase 1 space has achieved 100% committed occupancy. Given the positive response for Phase 2 AEI, Suntec REIT has brought forward ~32,000sqft from Phase 3 and has achieved 95% pre-commitment for the enlarged area. While retail passing rents at the mall eased from S$13.09 to S$12.69 with the inclusion of Phase 2 space (comprises few anchor tenants), we believe the rates would improve with the leasing of Phase 3, which is the crown jewel of the mall. Thus far, construction costs were within budget, with Phase 2 space expected to open shortly and Phase 3 AEI to complete by 4Q14.

Maintain BUY

On its capital management, Suntec REIT announced that it has signed a S$800m five-year unsecured loan facility to refinance the outstanding balance of its S$1.1b loan facility due in 2014 and 2015. Together with the Together with the recent private placement to pre-pay its S$350m debt due in 2015, Suntec REIT no longer has any refinancing needs till 2016. Gearing is also expected to drop to 33.9% from 37.3% currently, while average debt term will be extended to 4.2 years. We maintain BUY with unchanged S$1.85 fair value on Suntec REIT.