Suntec Reit

Kim Eng on 24 Apr 2013

Q13 DPU likely down. Suntec’s 1Q13 DPU is likely to be lackluster, dragged down by Suntec City Mall’s (SCM) ongoing renovation works. We estimate that the largest dip on FY13 DPU will occur in 1Q-2Q13, when Phase 1 new tenants have yet to start paying rentals and Phase 2 old tenants are being vacated for the AEI. We forecast 1Q13 DPU at 2.20 SG-cts (-5% QoQ; -10% YoY) and FY13 DPU at 9.2 SG-cts. (-3% YoY).

Look out for progress update on AEI. Pre-commitments for Suntec City Mall’s (SCM) Phase 1 post-AEI leases hit 83% in 4Q12 and we believe most were secured above the targeted SGD12.59 psf/mth. Suntec also reported that 37% of Phase 2 NLA has been pre-committed. We noted that Phase 2 AEI for SCM has commenced and the intensity of the refurbishment works could mean that overall AEI works should wrap up as scheduled by 4Q14.

Optimistic on SCM Rental Uplift. We estimate that the average passing rents for SCM post-AEI may be secured at SGD13.50 psf/mth. We think this is still conservative, given that passing rents at nearby Raffles City Mall are contracted at ~SGD18-19 psf/mth. In addition, the recent AEI at Causeway Point (suburban mall in Woodlands) has managed to uplift its average rent from SGD10.20 psf/mth (pre-AEI) to current SGD13.52 psf/mth, and we expect Suntec to do likewise, if not better, for a Downtown Core mall.

High chance of DPU top-up. Suntec received cash proceeds of ~SGD147m from the sale of Chijmes in 1Q12. We think it will keep the flexibility for DPU top-up in 2013, when its mall occupancy will be most affected (DPU: 9.22 cents in FY13F vs 9.49 cents in FY12). 1Q13/2Q13 quarters will witness the largest occupancy dip and we do not rule out the likelihood of a DPU top-up as early as 1H13. Reiterate BUY with a TP of SGD2.07, priced at P/B of 1x.

Convertible bonds. Suntec has issued a SGD280m convertible bond (CB) due 2018 at an interest rate of 1.4% (initial conversion price of SGD2.154). About SGD231.7m will be used to refinance its existing debt, which includes the SGD270m CB issued in 2008 with final redemption date on 20 Mar 2013 and coupon interest of 3.25%. Following cash settlement and cancellation, the principal amount of the 2013 CB remaining outstanding is SGD216.25m, which will be redeemed by the REIT at 105.5063% of its principal amount. We estimate interest savings of ~SGD5m pa.