Suntec REIT - RHB Invest 2018-04-25: Progressing Steadily

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Progressing Steadily

Suntec REIT’s operational DPU declined by 5.2% y-o-y in 1Q18, while overall DPU was flat on the back of higher capital distribution.
Amidst challenging local market conditions, management has been actively revamping and repositioning its key asset, Suntec City, which we see as a long term positive. The REIT has also been actively expanding its Australian presence, with the market now accounting for ~13% of NPI (from nil prior to 2013).

We expect its near term DPU to remain flat but a pick up is expected by end-2020, with contributions from two development properties kicking in. The stock offers FY18F yield of 5.3%, and trades at a P/BV of 0.9x, which we see as fair.
Maintain NEUTRAL call and Target Price of SGD1.75 (8% downside).

Suntec REIT’s gross revenue and NPI for 1Q18 rose by 2.6% and 1.9% y-o-y respectively, due to higher contributions from retail malls and a higher number of convention events. JV contributions were down 9% y-o-y mainly due to the one-off income received from One Raffles Quay in 1Q17.
Interest expense rose 9.4% y-o-y, on the back of higher financing cost (2.73% vs 2.42% in 1Q17). There was a higher capital distribution of SGD6.5m (1Q17: SGD3m), which helped DPU stay flat y-o-y.
Overall occupancy declined 0.4ppts q-o-q to 98.4%, due to slightly lower occupancy at its retail malls.
On the positive side, shopper traffic and tenant sales at its Suntec City Mall increased by 12.7% y-o-y and 5.2% y-o-y respectively, indicating better patronage post the recent revamp.

Suntec REIT’s stake in the Southgate complex (Southgate) will increase to 50% from 25% by May 2018. This comes after Dexus Trust exercised its put option in February to sell its remaining stake in the building.
The purchase consideration of AUD144.5m is the same as the initial price paid for its existing 25% stake. The acquisition will be fully funded by debt, and is expected to be DPU neutral.

The asset enhancement work will encompass the upgrading of lift lobbies and washrooms at every level. Works are expected to commence in 4Q18, and be completed by end-2021. We believe the AEI works are timely to fend off increasing competition from newly completed office buildings in the central business district (CBD) and Marina Bay district.
Office leasing momentum slowed down during the quarter, with 89,000 sqf of leases signed in 1Q18 (4Q17: 330,000 sqf). Demand came mainly from the consultancy and technology, media and telecommunications sectors.
About 9% of office leases are due for renewal in FY18, of which we expect flat to slightly negative reversions.

Redevelopment works at 9 Penang Road (30% stake, formerly known as Park Mall) is on schedule to be completed by 2019. Over in Australia, 477 Collins Street is now 45.8% pre-committed (with heads of agreement signed for an additional ~9% NLA), ahead of its expected completion in mid-2020.
The higher pre-commitments came after anchor tenant, Deloitte exercised its expansion right for an additional two levels.

We expect DPU to remain flat for the next two years. Our DDM-derived Target Price is based on COE of 7.6% and TG of 2%.
Potential catalysts are stronger-than-expected recovery in the Singapore office and retail markets, and accretive acquisitions.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-25

SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.750 Same 1.750