• 4Q16 DPU down 5.6% YoY
• Proactive leasing management
• Environment still challenging

4Q16 results within our expectations

Suntec REIT reported an in-line set of 4Q16 results. Gross revenue inched up 1.6% YoY to S$88.9m, as contribution from 177 Pacific Highway after practical completion offset the loss of income from the divestment of Park Mall and lower revenue from Suntec Singapore. DPU declined 5.6% YoY to 2.596 S cents given the drag from a lower NPI (-2.9% to S$60.7m), higher borrowing costs and cessation of income support for MBFC properties. For FY16, Suntec REIT’s gross revenue was down marginally by 0.3% to S$328.6m, while DPU was sustained at 10.003 S cents (flat YoY). Both figures formed 99.9% of our full-year forecasts.

Rental pressures likely to remain

Leases signed in 4Q16 for Suntec REIT’s Singapore office portfolio came in at an average rent of S$8.65 psf/month, slightly lower than in 3Q16 (S$8.78 psf/month), while committed occupancy for its office portfolio in Singapore was at a healthy 99.3%. However, looking ahead, we believe rental pressures would likely remain, given the uncertain macroeconomic environment and upcoming supply of office space this year. Cognisant of this fact, Suntec REIT has been actively managing its lease profile, and has only 9.3% of its office NLA (271,325 sq ft) expiring in 2017.

On the retail front, occupancy for its Singapore retail portfolio stood at 97.9%, as at 31 Dec 2016, with overall committed rents at Suntec City Mall relatively stable at S$11.20 psf/month, versus S$11.19 psf/month, as at 30 Sep 2016, following three consecutive quarters of QoQ declines. 22.5% of its retail NLA (209,486 sq ft) is up for renewal this year.

Upgrade to HOLD

We incorporate Suntec REIT’s full-year results in our model, and also update our valuation parameters by factoring in a higher risk-free rate of 2.7% (previously 2.4%) in light of a steeper yield curve environment. As we also roll forward our valuations, our DDM-derived fair value estimate inches slightly upwards to S$1.54 from S$1.53. Given expected potential total returns of -3.2%, we upgrade Suntec REIT to HOLD. The stock is trading at FY17F distribution yield of 6.0%, which is in-line with its five year forward mean of 5.9%.

Source: OCBC Research - 26 Jan 2017