Suntec REIT reported an in-line set of 2Q17 results. Gross revenue and NPI jumped 10.6% and 12.8% YoY to S$87.3m and S$59.4m, respectively. This was driven by higher office revenue due largely to contribution from 177 Pacific Highway in Australia, but partially offset by weaker retail revenue from Suntec City mall and lower revenue from Suntec Singapore.

DPU fell marginally by 0.3% YoY to 2.493 S cents, as there were S$212.0m in principal amount of convertible bonds which were converted or redeemed in May this year.

For 1H17, Suntec REIT’s gross revenue rose 11.7% to S$175.7m and formed 49.8% of our FY17 forecast. DPU of 4.918 S cents represented growth of 0.9%, and constituted 48.7% of our full-year projection.

Separately, Suntec REIT also announced that it has proposed to acquire a 50% interest in Olderfleet, 477 Collins Street, a freehold land and property to be developed within the Western Core of the CBD in Melbourne from Mirvac Group for a purchase consideration of A$414.2m. Construction is expected to be completed by mid-2020, and would be funded by debt.

Suntec REIT has estimated an initial NPI yield of 4.8% post completion, supported by annual rent escalation of between 3.5%-3.75% and a rent guarantee by Mirvac on any unlet space for five years post practical completion.

Pending an analyst briefing later, we place our HOLD rating and S$1.68 fair value estimate under review.

Source: OCBC Research - 26 Jul 2017