• 1Q17 DPU rose 2.3% YoY
• Minimal FY17 office lease expiries
• HOLD with higher FV

1Q17 Results Within Our Expectations

Suntec REIT reported an in-line set of 1Q17 results. Gross revenue jumped 12.9% YoY to S$88.4m, while NPI accelerated 14.6% to S$61.8m. The former and latter accounted for 25.1% and 25.0% of our FY17 forecasts, respectively. Growth was largely driven by contribution from 177 Pacific Highway in Australia, which obtained its practical completion in Aug 2016, but partially offset by lower retail revenue from Suntec City mall and Suntec Singapore.

Encouragingly, Suntec REIT delivered positive DPU growth of 2.3% YoY to 2.425 S cents despite a smaller distribution from capital (S$3.0m or 0.118 S cents/unit in 1Q17 versus S$4.0m or 0.158 S cents/unit in 1Q16). This accounted for 24.0% of our full-year forecast.

Office Showing Signs of Stabilising; Retail Still Muted

For Suntec REIT’s Singapore retail portfolio, 20.8% of its NLA is expiring for the remainder of 2017, as at 31 Mar 2017. Although we expect rental pressure to remain, we believe the situation may be improving as the renewals are predominantly for Suntec City mall phase 2 AEI, whereby the passing rents are likely lower than for phase 1.

On a positive note, Suntec City mall achieved committed occupancy of 98.4% (+0.5 ppt QoQ), while footfall and tenant sales psf grew 7.3% and 4.3% YoY, respectively. Meanwhile, its Singapore office portfolio’s average rent came in at S$8.66 psf/month, as at 31 Mar 2017, which was largely unchanged from the previous quarter (S$8.65 psf/month as at 31 Dec 2016). This suggests that the office segment is showing signs of stabilising. Only 5.9% of Suntec REIT’s office leases are up for renewal from 2Q-4Q 2017, a reflection of Suntec REIT’s proactive lease management.

Maintain HOLD

With investor’s hunt for yield strengthening in recent weeks, coupled with signs that the office market may be bottoming out and improving operational metrics for Suntec REIT, we lower our cost of equity assumption from 8.1% to 7.5%. Our DDM-derived fair value estimate is consequently increased from S$1.54 to S$1.68. However, we maintain our HOLD rating as we see limited potential total returns of 1.5% at this juncture.

Source: OCBC Research - 27 Apr 2017