SUNTEC REIT: It's Full Throttle For Suntec City AEI Phase 1
(BUY, SGD1.61, TP: SGD1.78)
Phase 1 of Suntec City AEI was completed recently and re-launched on 21 June. We discovered from a tour of the mall that about 45% of the shops have commenced operation while the rest will open sometime this month. The additional income arising from the re-launch from 3Q13 onwards prompt us to upgrade SUN to a BUY, and lift our TP to SGD1.78.
Suntec City AEI Phase 1 completed. Phase 1 of the asset enhancement initiative (AEI) at Suntec City Mall was part of the three-phase SGD410m AEI project initiated last June. This recently completed phase, encompassing an area of c.193,000 sq ft, was re-launched on 21 June. In Phase 1, part of the convention centre’s levels 1 and 2 were converted for retail use. The converted space will form part of the 125,000 sq ft of additional retail space when all three phases of the AEI are completed by 4Q14.
Initial earnings to stream in from 3Q13. As Management indicated previously, 96.7% of the total net leasable area (NLA) in Phase 1 has been pre-committed, although we speculate that this may be closer to 100% currently. We expect part of the income from the estimated average rental rate of SGD12.59 per sq ft per month (psf/mth) (+25%) and higher net property income (NPI) of SGD7.8m/mth (+33%) post-Phase 1 AEI, to be realized in 3Q13. We also expect the full income contribution to kick in by 4Q13 as most shops are scheduled to commence operation this month.
Upgrade to BUY, with higher SGD1.78 TP. SUN is expected to report a weak 2Q13 due to the closure of phases 1 and 2 of the AEI areas. However, given the currently high portfolio occupancy rate (office: 100%; retail: 98.2%) coupled with the re-launch of Phase 1 AEI, we believe the company will be able to reap the benefits upon completion of the AEI at Suntec City by 4Q14.
This prompts us to project dividend yields of 5.7% and 6.3% for FY13/FY14 respectively. As we are positive on the stock, we upgrade our rating to BUY, with our TP revised upwards to SGD1.78
Publish date: 05/07/13