• 1Q16 DPU grew 6.3% YoY
• Growth driven by capital distributions
• Share price has overrun fundamentals

1Q16 results within our expectations

Suntec REIT reported 1Q16 gross revenue of S$78.3m, representing an increase of 5.2% on a YoY basis. This formed 22.4% of our FY16 forecast. Growth was driven by the opening of Suntec City mall (Phase 3) following its AEI completion, and higher revenue contribution from Suntec City Office and Suntec Singapore Convention & Exhibition Centre, but partially offset by the divestment of Park Mall in Dec 2015. DPU rose 6.3% YoY to 2.371 S cents, and accounted for 23.6% of our full-year projection.

This was boosted by a distribution from capital of S$4.0m (~0.158 S cents per unit). There was no such distribution in 1Q15. Excluding this impact, Suntec REIT’s distribution from operations would have declined marginally by 0.8%.

Managing its lease expiry profile, but risks remain

During the quarter, Suntec REIT had focused on managing its lease expiry profile, and successfully renewed and replaced ~225k sq ft of office leases. It has a balance of only 6.0% of its leases (as a percentage of total office NLA) due to expire for the rest of FY16. However, office leases secured came in at an average rent of S$8.67 psf/month, which was softer than 4Q15 (S$8.86 psf/month) and 1Q15 (S$9.24 psf/month).

In addition, Suntec REIT has 19.7% of its office lease expiries to contend with in FY17. On the retail front, Suntec REIT has a balance of 23.1% of its retail leases expiring for the remainder of 2016, and we understand that renewals for Suntec City mall (Phase 1) have been a mixed bag. Overall committed passing rent for Suntec City mall is currently S$12.00 psf/month, versus S$12.04 psf/month as announced in 4Q15.

Valuations appear rich, downgrade to SELL

We fine-tune our assumptions slightly, but keep our S$1.51 fair value unchanged. Suntec REIT’s share price has appreciated 12.6% YTD. We believe valuations now appear stretched, with the stock trading at 5.8% FY16F distribution yield. This is close to half a standard deviation below its 5-year average forward yield of 6.1%, at a time when headwinds are plaguing both the retail and office sectors. Hence we are downgrading our rating on Suntec REIT from ‘Hold’ to SELL.

Source: OCBC Research - 22 Apr 2016