Suntec REIT - CIMB Research 2018-01-24: 4Q17 Retail Revenue Drag Decelerating

Suntec REIT - CIMB Research 2018-01-24: 4Q17 Retail Revenue Drag Decelerating SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - 4Q17 Retail Revenue Drag Decelerating

  • Suntec REIT's 4Q17 DPU met expectations, at 26% of our FY17 forecast. FY17 DPU broadly met our expectation at 99.8% of our forecast.
  • Office leasing appetite improving in Singapore.
  • Retail rental drag eased in 4Q as shopper traffic and tenants sales rebounded y-o-y.
  • Visible acquisition growth pipeline.
  • Upgrade to HOLD, with a revised Target Price of S$2.17.

4Q17 results highlights 

  • Suntec REIT reported a slight 1.8%/ 2.2% dip in 4Q17 gross revenue/ NPI to S$87.3m/ S$59.4m. However, distribution income rose 5% y-o-y to S$69.3m, inclusive of a capital top-up of S$10m, translating to DPU of 2.6 Scts. 
  • For the full year, DPU of 10 Scts was flat y-o-y with the inclusion of S$29m capital top up from divestment gains. The trust booked a S$54.6m revaluation surplus across its portfolio, translating to a BV of S$2.12/unit.

Narrowing negative rental reversions 

  • Suntec REIT renewed/ leased 330,000 sq ft of office space in 4Q17, of which 30% are new leases, and achieved portfolio occupancy of 99.2%. Although average rents of S$8.50psf was lower q-o-q, including renewals by anchor tenants, management observed that Singapore's office leasing sentiment has improved. 
  • Suntec REIT has 11.3%/15% of office space to be renewed in FY18F/FY19F. In Australia, committed occupancy at Southgate and 177 Pacific Highway rose to 90.7%/100% in 4Q while 477 Collins St is 39% pre-leased.

Retail leasing stabilised in 4Q17 

  • On the retail side, it re-contracted signed 358,000 sq ft in 2017 (4Q: 50,000 sqft), of which 47% are new leases. Retail occupancy rose to 99%. 
  • Meanwhile, shopper footfall jumped 12.8% y-o-y to 45m in 2017 while tenants sales psf expanded 4.8% y-o-y. In tandem with its tenant remixing and right-sizing, 22 new-to-market concept stores were opened during the year, attracting more patronage to the property. 
  • The trust will continue its active tenant adjustment and explore increasing asset utilisation at the mall.

Visible acquisition growth opportunities 

  • In terms of medium-term inorganic growth outlook, 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 of 9 Penang Rd post completion of the project's redevelopment in 2019F. 
  • Suntec REIT's balance sheet metrics remain healthy with 75% of its interest cost hedged while gearing of 36.4% at end-FY17 gives the trust headroom to pursue acquisition growth.

Upgrade to HOLD on stabilising revenue outlook 

  • We adjust our FY18-19F DPU marginally and introduce our FY20 projections. However, our DDM-based Target Price rises to S$2.17 as we roll forward our assumptions. 
  • With its retail leasing operations stabilising and rental drag decelerating, Suntec REIT's earnings outlook has improved. While valuations are not very compelling given the run-up in Suntec REIT's share price, a total return of c.5% justifies our HOLD rating. 
  • Upside risk could come from a faster recovery in retail rents while downside risk could come from slower economic growth.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-24
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 2.17 Up 1.830