Suntec REIT - CIMB Research 2017-10-27: No Surprises

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - No Surprises

Suntec REIT's 3Q/9MFY17 DPU was in line with expectations, at 25%/74% of our FY17F forecast.
Office performance was lifted largely by 171 Pacific Highway revenue.
Shopper traffic and tenant sales have continued to improve, while rental income was affected by the ongoing tenant remixing exercise.

Suntec REIT reported a higher 3Q17 topline of S$91.1m due largely to additional contributions from 171 Pacific Highway and Suntec Singapore, while distribution income came in 2.4% higher yoy at S$65.9m, inclusive of an S$8m capital top-up. However, DPU slipped 2.1% yoy to 2.483 Scts due to dilution from the 95.7m additional units issued from conversion of CBs.
9MDPU of 7.401 Scts fell 0.1% yoy to account for 73.8% of our FY17F forecast.

The trust renewed/leased 150k sqft of office space in 3Q at an average S$8.35psf/mth, of which 35% were new leases with a 68% retention rate. This contributed to an uptick in performance at Suntec City Singapore, which was partly offset by a lower JV income from MBFC and ORQ.
Office portfolio occupancy was at 99% at end-3Q17.
Suntec REIT has a remainder 2% of office leases to be re-contracted in FY17. It has also reduced its FY18 expiries to 14.9% of NLA and is in final negotiations for another 9.8%.

The trust signed 117,000sqft of retail leases in 3Q. 70% of these were new tenants as the manager continued to rejig its tenant mix at Suntec City Mall. Committed occupancy was 99.3% while YTD shopper footfall and tenant sales rose by 12.2% and 4% respectively, as a testament to its strengthening retail offerings.
It has another 3.7% and 23% of retail NLA to be renewed in FY17 and FY18. As Suntec REIT will continue with its active tenant adjustment strategy, we anticipate rental growth to remain modest during this period.

In terms of inorganic growth outlook in the medium term, Suntec REIT has the option to buy an additional effective 25% stake in the Southgate Complex in Melbourne and potentially one of the office towers post the completion of redevelopment of 9 Penang Rd. This could raise gearing from the present 36.8% to 42%.
Less than 20% of its loans are due to be refinanced in FY18 and all-in financing cost averaged 2.55% as at end-3Q17.

We leave our FY17-19F DPU estimates unchanged but lift our DDM-based target price slightly to S$1.83, on adjustment of cost of equity to 7.5% (vs. 7.6% previously).
While we note Suntec City Mall has continued to trade better, we anticipate growth would likely remain sluggish in the near term with the ongoing tenant remixing exercise.
Valuations, at FY18 DPU yield of 5.1%, are at the lower-end of its peer comparison range.
Upside risks could come from faster-than-expected stabilisation of retail assets.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-10-28

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