Suntec – DBSV
Execution is the key
• 2Q12 results sequentially lower but within expectations
• Leasing activities strong for Suntec Offices, precommitments for phase 1 of the new retail mall at 58%
• BUY, TP raised slightly to S$1.61
Highlights
Results in line. Suntec’s gross revenues and net revenue declined by 3-7% q-o-q as the AEI at Suntec retail mall commenced, as well as an income vacuum from the sale of CHIJMES. The loss of income from the expiry of One Raffles Quay’s (ORQ) income support was partly mitigated by the GST rebates and positive rental reversions. Distributable income was S$53m or 2.631cts DPU (-6.8 y-o-y, -3.7% q-o-q), bringing 1H DPU to 4.814 cents or 54% of FY12 forecast.
Our View
Leasing activities for Suntec offices still strong. Despite weaker market sentiment, office rents at Suntec City held steady at S$8.71/psf/mth vs S$8.79 a quarter ago supported by full occupancy. In total, the trust renewed an impressive 146,456 sf of office space in the quarter, leaving only 2.5% of space to be renewed in 2H12 and is now forward leasing FY13 space.
AEI at Suntec City mall has commenced. As expected, average monthly passing rent for the retail space at Suntec City dropped 8% q-o-q to S$9.35 psf. This was largely due to the closure of Galleria, given its more prime location and we expect further dips as the F&B restaurants and retail space around The Fountain close progressively in the 2H. In total, the affected c.193,000 sf of retail space will reopen in Apr-May 2013 and rents should moved up subsequently. As of 2Q12, c58% of the space has been pre-committed vs 45% a quarter ago and makeover for the whole mall is expected to be completed by 2014 vs the earlier guidance of 2015.
Sufficient funding for Phase 1 and 2. Gearing is at 37.5% and the group has sufficient cash resources from the sale of CHIJMES to fund the capex for the AEI in Phase 1 and 2. Meanwhile, refinancing for its S$200m loan due in Oct should be completed soon.
Recommendation
Maintain BUY. We have nudged up our FY12/13F DPU by c.3.0% and TP by 2.0% to S$1.61 as we lowered discount rate (risk free pegged to 1.8%) while also taking into account higher renewal assumptions for its offices at Suntec City. FY12/13F yields remain attractive at c.6.0%. Upside risks to earnings estimates hinge on the topping up of distributions from the sale proceeds of CHIJMES which we have not factored in at this moment.
FCT – DBSV
Still looking attractive
• 3Q12 DPU of 2.6 Scts a record
• Operational performance stable; acquisition catalyst only in the medium term
• Maintain BUY, TP revised higher to S$1.93
Strong 3Q12. Topline and Net property income (NPI) of S$35.6m and S$24.7m were 30% and 32% respectively higher compared to a year ago. The strong y-o-y growth was well-balanced portfolio wide, underpinned by a 45% uplift in topline from Causeway Point post the intensive phase of its asset enhancement program coupled with a full quarter contribution from Bedok Point, which was acquired in 4Q11. Interest costs were lower at 2.75% post refinancing of existing short-term borrowings from recent MTN issues. As such, distributable income came in S$21.4m (boosted by S$1.2m that was retained in 1H12), translating to a record DPU of 2.6 Scts for the quarter.
Operational outlook stable. Portfolio occupancy remained steady q-o-q at 93.7% – the slight dip in occupancies at Causeway Point to 87.7% was compensated by higher occupancy rates from the reopening of a Food Court in Northpoint which saw occupancies head back up to 99.7%. Average reversions continue to remain positive at 2.7%-42.9%, with the higher end due to a single lease that was contracted at a significantly higher reversion rate. Average reversions in rental rates for 9M12 remained healthy at 12.5%. Looking ahead, we expect reversions to remain positive, underpinned by the progressive completion of AEI of Causeway Point by end of Dec’12.
Maintain BUY, TP raised to S$1.93. Stock remains attractive for its defensive earnings profile. Our TP is raised as we account for the better than expected performance of Causeway Point, lower interest cost and lower risk free assumption as we roll forward our numbers. FY13/14F yield of 5.8-5.9% remains attractive. Re-rating catalysts will hinge on the acquisition of Changi City Point.
Suntec – Kim Eng
Suntec REIT
Embarking on the enhancement journey
1H12 results inline but higher expenses from Suntec Singapore. 1H12 revenue at SGD144m, up 18% YoY, was 57% of our FY12 forecast and 55% of consensus estimate. 1H12 DPU at 4.184 SG-cts, down 2% YoY, was 52% of ours and consensus estimate.
High expenditure from Suntec Singapore. Operating expenses (consolidated basis) for Suntec Singapore escalated 12% QoQ to SGD12.6m from SGD11.3m last quarter. 1H12 expenses was SGD23.9m, vis-à-vis 1H12 revenue of SGD27.8m (representing a low NPI margin of 14% from previous 28%-29%). This resulted partly in Suntec’s overall 1H12 operating expenses escalating 74% YoY despite 1H12 revenue inching up only 18% YoY. We reckon that this may due to preparation costs incurred for getting the convention area ready for phase 1 refurbishment.
Portfolio review – Suntec City Office achieve 100% occupancy. Suntec City office occupancy improved from 99.5% last quarter to full occupancy at an average rent of SGD8.71 psf/mth. The last time the office area was fully leased out was in Mar 2008. Due to phase 1 AEI works, Suntec City Mall occupancy was dragged down to 75%-78%, according to our estimate. This caused average passing rent to inch down 8.5% QoQ to SGD9.35. One Raffles Quay achieved full occupancy, whilst occupancy for the MBFC1 stood at 99.5%.
Suntec City AEI expedited. Completion in end 2014. Phase 1 AEI (~193k sqft), which encompasses Suntec Singapore and the Galleria section commenced on 1 Jun 2012 and will complete by ~Apr 2013. 58.5% of Phase 1 leases has been precommited so far. We understand that Carrefour will be shifting down to the basement and the existing food court will close in Dec 2012; a new food court will open in 1Q13. The refurbishment schedule has also been brought forward, with Phase 2 (~383k sqft) completing in 4Q13 and Phase 3 & 4 (249k sqft) to be done by end 2014.
Adjustments to our estimates. We lower our FY12-14F DPU by 0.8%-1.8% due to (1) higher-than-expected occupancy drops for Suntec City Mall (2) catering rent-free periods (1-2 mths) for existing tenants that are relocating in the interim and (3) higher financing costs. However, FY15 DPU is boosted up 2% due to the earlier completion of the asset enhancement works. Reiterate HOLD with TP of SGD1.42.
MLT – CIMB
Stable quarter
1Q13 was boosted by positive rental reversions and completed acquisitions. Management appears to be adopting a defensive stance as it continues to trade rentals for occupancy. Stability remains underpinned by its long WALE and high occupancy.
1Q13 DPU meets our estimates and consensus at 24% of our full-year estimates. Our forecast factors in S$150m of acquisitions for FY13. We keep DPUs, DDM target price (disc. rate: 8.6%) and rating unchanged pending analyst briefing. Maintain Outperform on the catalyst from acquisitions.
1Q13 NPI up 18% yoy
Underpinned by a long WALE of six years and high occupancy, MLT’s portfolio remains one of the most stable among S-REITs. 1Q13 NPI was up 18% yoy and 10% qoq as improved NPI margins added to a 17% growth in top-line from organic growth and acquisitions. While net profit was hit by a S$15.1m foreign exchange loss, the impact was mitigated as 85% of its distributable amount was hedged. DPU grew by 6% yoy after interest and perpetuity coupon payments and 2% qoq excluding distribution of divestment gains last quarter.
Trading rentals for occupancy
Rental reversions remained commendable despite moderation to 10% from 12% last quarter. This is at the top end of management’s previous guidance of 5-10%, in line with its stance of trading rents for higher occupancy in the face of macro-headwinds. Occupancy strengthened to 99.0% from last quarter’s 98.7%, benefitting from good take-up at three of its local multi-tenanted assets, which were converted from single-user assets last year.
Capital management and acquisitions
Management remains on the lookout for acquisitions, although its top priority continues to be in active asset and lease management. Asset leverage is unchanged at 37%, still conducive for debt-funded acquisitions. We have assumed S$150m of acquisitions for FY13.
FCT – OCBC
STRONG GROWTH MOMENTUM
•Sterling quarter
•Strong rental reversions
•Asset injection likely in FY13
3QFY12 results exceeded expectations
Frasers Centrepoint Trust (FCT) turned in a good set of 3QFY12 results last evening. NPI was up 32.1% YoY to S$24.6m, while distributable income grew by 37.1% to S$20.2m. The strong performance was achieved mainly on the back of a 60.9% NPI growth by Causeway Point (CWP) and S$2.0m NPI contribution from newly acquired Bedok Point. For the quarter, DPU came in at 2.6 S cents (+33.3% YoY), partially boosted by distribution of S$1.2m which was retained in previous quarters. Together with 1HFY12 DPU of 4.7 Scents, 9MFY12 DPU totaled 7.3 S cents, forming 76.8% of our and consensus FY12 DPU projections.
Improved operating statistics
After dipping 4.0ppt in prior quarter, FCT’s portfolio occupancy as at 30 Jun improved marginally to 93.7%. The re-opening of the food court in May, we note, was the primary driver for the better number. This was somewhat offset by lower occupancy at CWP (down 3.6ppt QoQ to 87.8%) as refurbishment works commence on the fifth and seven floors. However, management reiterated that the asset enhancement initiative at CWP is in its final phase and that the mall is likely to be fully occupied when the project is completed in Dec 2012. Additionally, FCT continued to track positive rental reversions, where rental rates of new leases were 27.2% higher than preceding leases on average (2Q: +11.0%). This reflects continued strong demand for suburban retail space, in our view.
Retain BUY with higher fair value
Due to the better-than-expected results, we now re-jig our FY12-13 forecasts to reflect better occupancy and rental rates. This in turn raises our fair value from S$1.74 to S$1.89. We continue to like FCT for its pure suburban exposure, strong execution and sturdy financial position. We believe the injection of Changi City Point may happen in the next fiscal year, as its leases appear to have stabilized (though business park segment has yet to obtain TOP). This may provide potential for further DPU expansion. Maintain BUY.