• 3Q14 DPU up 1.7% YoY
• Slower-than-expected Phase 3 commitment
• Office portfolio to outperform

3Q14 results missed our expectations

Suntec REIT’s 3Q14 revenue grew 8.5% YoY to S$71.5m, underpinned largely by the completion of Phase 2 (opened in Jun 2014) of the asset enhancement works in Suntec City mall. DPU inched up 1.7% YoY to 2.328 S cents. This fell short of our expectations but was in-line with Bloomberg consensus. For 9M14, gross revenue jumped 26.5% to S$205.6m, while DPU was up slightly by 0.8% to 6.823 S cents. This constituted 67.8% and 70.2% of our FY14 projections, respectively. Portfolio occupancy remained healthy, coming in at 100% for Office and 98.4% for Retail. Suntec City mall has attained an overall committed occupancy of 86% YTD (Phase 1: 100%; Phase 2: 99.4%; Phase 3: 60%). We believe commitment for Phase 3 has progressed slower-thanexpected, given that completion is expected by end-2014. Management is cognisant of the headwinds facing the retail sector in Singapore, but retained its ROI projection of 10.1%. Passing rents for Phase 1 and Phase 2 were stable at S$12.59 psf pm compared to 2Q14 (S$12.57 psf pm).

Office momentum still healthy

Suntec REIT achieved an average rent of S$8.24 psf pm for office leases secured in 3Q14. This was lower than the S$8.98 psf pm rate in 2Q14. Management explained that out of the 280,000 sqft of space replaced, 150,000 sqft was renewed by an anchor tenant at a discount to the market rate (new lease to commence in FY15). Nevertheless, the new rental rate for this tenant still represents a healthy double-digit increase from its previous lease. If we exclude the impact of this renewal, Suntec REIT’s average rent secured in 3Q14 would have been in excess of S$9 psf pm. Management guided that it is confident its office portfolio performance in FY14 would be better than FY13.

Lower forecast, but maintain BUY

We pare our FY14 and FY15 DPU forecasts by 4.1% and 3.1%, respectively. Our DDM derived fair value estimate correspondingly falls from S$1.96 to S$1.90. However, we maintain BUY on Suntec REIT, as we believe valuations remain undemanding, with the stock trading at 0.85x FY14F P/B.

Source: OCBC Research - 23 Oct 2014