Suntec Reit

Kim Eng on 20 Jul 2012

1H12 results inline but higher expenses from Suntec Singapore. 1H12 revenue at SGD144m, up 18% YoY, was 57% of our FY12 forecast and 55% of consensus estimate. 1H12 DPU at 4.184 SG-cts, down 2% YoY, was 52% of ours and consensus estimate.

High expenditure from Suntec Singapore. Operating expenses (consolidated basis) for Suntec Singapore escalated 12% QoQ to SGD12.6m from SGD11.3m last quarter. 1H12 expenses was SGD23.9m, vis-à-vis 1H12 revenue of SGD27.8m (representing a low NPI margin of 14% from previous 28%-29%). This resulted partly in Suntec’s overall 1H12 operating expenses escalating 74% YoY despite 1H12 revenue inching up only 18% YoY. We reckon that this may due to preparation costs incurred for getting the convention area ready for phase 1 refurbishment.

Portfolio review – Suntec City Office achieve 100% occupancy. Suntec City office occupancy improved from 99.5% last quarter to full occupancy at an average rent of SGD8.71 psf/mth. The last time the office area was fully leased out was in Mar 2008. Due to phase 1 AEI works, Suntec City Mall occupancy was dragged down to 75%-78%, according to our estimate. This caused average passing rent to inch down 8.5% QoQ to SGD9.35. One Raffles Quay achieved full occupancy, whilst occupancy for the MBFC1 stood at 99.5%.

Suntec City AEI expedited. Completion in end 2014. Phase 1 AEI (~193k sqft), which encompasses Suntec Singapore and the Galleria section commenced on 1 Jun 2012 and will complete by ~Apr 2013. 58.5%* of Phase 1 leases has been precommited so far. We understand that Carrefour will be shifting down to the basement and the existing food court will close in Dec 2012; a new food court will open in 1Q13. The refurbishment schedule has also been brought forward, with Phase 2 (~383k sqft) completing in 4Q13 and Phase 3 & 4 (249k sqft) to be done by end 2014.

Adjustments to our estimates. We lower our FY12-14F DPU by 0.8%- 1.8% due to (1) higher-than- xpected occupancy drops for Suntec City Mall (2) catering rent-free periods (1-2 mths) for existing tenants that are relocating in the interim and (3) higher financing costs. However, FY15 DPU is boosted up 2% due to the earlier completion of the asset enhancement works. Reiterate HOLD with TP of SGD1.42.