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.

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.

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.

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.

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.

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

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