• 2Q17 DPU -0.3% YoY
• Footfall and tenants’ sales grew
• HOLD with higher FV

2Q17 Results Within Our Expectations

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. However, 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 a growth of 0.9%, and constituted 48.7% of our full-year projection. Encouragingly, Suntec City Mall saw a 0.9 ppt QoQ improvement in committed occupancy to 99.3%, and 1H17 footfall and tenants’ sales psf grew 11.0% and 5.3% YoY.

Although we believe rental reversions were still largely negative, management has set out a strategy to carve out ~20% of the mall’s NLA into smaller units to facilitate its leasing activities. For Suntec REIT’s Singapore office portfolio, the average rent came in at S$8.89 psf/mth, higher than the S$8.66 psf/month registered in 1Q17.

Proposed Acquisition of Premium Grade Office Asset in Melbourne

Separately, Suntec REIT also announced that it has proposed to acquire a 50% interest in Olderfleet, 477 Collins Street, a freehold land and office 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 escalations of between 3.5%-3.75% and a rent guarantee by Mirvac on any unlet space for five years post practical completion. This property has already secured a 39.1% precommitment from Deloitte Australia on a 12-year lease.

Maintain HOLD

We finetune our assumptions by incorporating the aforementioned acquisition and enlarged unit base from the convertible bonds conversion in our model, which culminates in our FY17 and FY18 DPU forecasts falling by 1.0% and 0.9%, respectively. However, as we also apply a lower cost of equity assumption of 7.1% (previously 7.5%) to take into account the improvement in market sentiment and Suntec REIT’s healthier operating metrics, our fair value estimate is bumped up from S$1.68 to S$1.80. Maintain HOLD.

Source: OCBC Research - 27 Jul 2017