OCBC Investment Research downgraded Suntec Reit on Friday, a day after the property trust posted a 6.3 per cent growth in its distribution per unit (DPU) to 2.371 Singapore cents for the first quarter of this year.
Analyst Andy Wong noted that the Q1 DPU accounted for 23.6 per cent of the research house's full-year projection.
"This was boosted by a distribution from capital of S$4.0 million (about 0.158 Singapore cents per unit). There was no such distribution in 1Q 2015. Excluding this impact, Suntec Reit's distribution from operations would have declined marginally by 0.8 per cent," Mr Wong explained.
He also noted that the trust has been focused on managing its lease expiry profile, and successfully renewed and replaced about 225,000 square feet of office leases. It has a balance of only 6 per cent of its leases - as a percentage of total office net lettable area - due to expire for the rest of FY2016.
However, the office leases secured came in at an average rent of S$8.67 per square foot per month (psf/month), which was softer than the S$8.86 psf/month seen in Q4 2015 and S$9.24 psf/month in Q1 2015.
In addition, Suntec Reit has 19.7 per cent of its office lease expiries to contend with in FY2017.
"On the retail front, Suntec Reit has a balance of 23.1 per cent of its retail leases expiring for the remainder of 2016, and we understand that renewals for Suntec City mall (Phase 1) have been a mixed bag. Overall committed passing rent for Suntec City mall is currently S$12.00 psf/month, versus S$12.04 psf/month as announced in 4Q 2015," he said.
Mr Wong said the Reit's valuations appeared rich. Hence the downgrade to a "sell" from a "hold" given the "headwinds plaguing both the retail and office sectors". Its fair value is left unchanged at S$1.51 a unit.
"Suntec Reit's share price has appreciated 12.6 per cent year-to-date. We believe valuations now appear stretched, with the stock trading at 5.8 per cent FY16 forecasted distribution yield," Mr Wong said.
At 10.13am on Friday, Suntec Reit was trading at S$1.715 a unit, down S$0.030, or 1.72 per cent.