Suntec REIT downgraded to Reduce by Nomura on potential for DPU cut

An entrance to Suntec City mall; taken October 2018.An entrance to Suntec City mall.

Nomura downgraded Suntec REIT to Reduce from Neutral, saying the REIT’s 10 Singapore cent distribution per unit (DPU) appeared unsustainable.

“A cut in annual DPU will likely be a negative surprise for the market,” it said in a note on Thursday.

It cut its target price on Suntec REIT to S$1.50 from S$1.60 after rolling over the valuation to 2019 and applying a higher target yield because of expectations for a likely decline in DPU.

Suntec REIT’s manager has distributed S$118 million, or 4.7 Singapore cents a unit, from capital to maintain the total DPU at 9.3 to 10 Singapore cents a year, it noted.

But it added, “as interest expenses rise over the next few years and with aggregate leverage already at 38 percent as of end-second quarter 2018 (with two projects still under development), we think the practice of distributing out of capital may not be sustainable,” Nomura said.

It estimated that a “more realistic” payout was closer to 9 Singapore cents a year.

To maintain the distribution, Suntec REIT’s manager could unlock capital by selling some of its office space at Suntec City, where strata-titled space has changed hands at around S$2,500 a square foot recently, marking an 11 percent premium over the valuation in Suntec REIT’s book, Nomura said.

“This however implies that Suntec REIT’s DPU is likely to be just flat at 10 Singapore cents a year even in the bull case,” it said, adding that doesn’t justify its yield spread.

It noted that the units currently trade around 4.9 percent 2019 yield; the Singapore 10-year government bond yield was at 2.605 percent at 12:20 P.M. SGT, according to Tullett Prebon data.

Units of Suntec REIT fell 1.64 percent to S$1.80 by 11:59 A.M. SGT, while Singapore’s Straits Times Index was down 2.64 percent.

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