• 2Q15 DPU up 10.3% YoY
• Rental pressures to remain
• Keep our SELL rating and FV

2Q15 results within our expectations

Suntec REIT reported a 19.6% YoY increase in its 2Q15 gross revenue to S$81.4m, underpinned by the opening of Phase 2 of Suntec City mall in Jun 2014 and better performance from Suntec Singapore. DPU grew 10.3% YoY to 2.50 S cents, of which 0.239 S cents/unit was contributed by distribution from capital.

For 1H15, Suntec REIT’s gross revenue jumped 16.3% to S$155.9m, forming 49.4% of our FY15 forecast. DPU of 4.73 S cents represented growth of 5.2%, and this made up 48.8% of our full-year projection. We view this set of results as in-line with our expectations.

Leasing headwinds persist

Although committed occupancy at Suntec City mall’s Phase 3 improved to 86% (end-1Q15: ~80%), we opine that this is still at a suboptimal level since most tenants have already commenced operations. This muted leasing momentum is reflective of the challenging retail environment.

Overall committed occupancy todate for the Suntec City AEI stood at 95.3% (+1.7 ppt QoQ), while overall committed passing rent of S$12.12 psf per month was a slight decline from 1Q15 (S$12.15 psf per month) and 4Q14 (S$12.27 psf per month). Rental pressures are likely to remain, in our view. Meanwhile, on the office front, Suntec City’s committed occupancy slipped from 99.6% to 98.4%, which management attributed to frictional vacancies.

Leases secured for the quarter came in at an average rent of S$9.14 psf per month, slightly lower than 1Q15’s S$9.24 psf per month. Management remained positive on its office portfolio performance in 2015, but we believe its earnings visibility for 2016 is cloudier, given the large upcoming supply. Suntec REIT has 22.6% of its total office NLA (545,491 sq ft) expiring in 2016.

Maintain SELL

Regarding Suntec REIT’s proposed divestment of Park Mall for S$411.8m, (expected to be completed by 3Q15), we expect a dip in distribution from operations, but management highlighted that it is open to making capital distributions from the sales proceeds to mitigate this. We maintain our forecasts, SELL rating and S$1.50 fair value estimate on Suntec REIT.

Source: OCBC Research - 24 Jul 2015