Suntec REIT - DBS Research 2018-10-24: More Green Shoots


Suntec REIT - More Green Shoots

  • Suntec REIT's 3Q18 DPU of 2.491 Scts (+0.3% y-o-y) in line with expectations.
  • Suntec City Mall maintains recovery path with 5% growth in tenant sales and double-digit rental reversions.
  • Better times ahead for office portfolio on the back of rising spot office rents.
  • Maintain BUY, Target Price of S$2.30.

What’s New

3Q18 DPU up 0.3% y-o-y

  • Suntec REIT delivered 3Q18 DPU of 2.491 Scts (+0.3% y-o- y). This resulted in 9M18 DPU hitting 7.398 Scts (flat y- o-y), representing c.74% of our FY18F DPU and in line with our expectations.
  • In 3Q18, DPU was boosted by S$10m worth of capital distributions similar to 2Q18 but up from S$8m in 3Q17. Thus, underlying 3Q18 DPU came in at 2.117 Scts (- 2.9% y-o-y) with 9M18 underlying DPU at 6.405 Scts (- 4.1% y-o-y) contributing c.73% of our FY18F DPU. This is largely in line with our expectations.
  • The decline in underlying 3Q18 DPU was driven by a 2.5% and 11.4% drop in 3Q18 revenue and NPI to S$88.8m and S$56.5m respectively. The softer financial performance was largely attributed to the weaker AUD, transitionary vacancy at Suntec City office as tenants have not physically moved into their premises and lower Singapore associate contribution arising from higher interest and marketing costs, as well as lower occupancy at Ocean Financial Centre (96% vs 100% in 2Q18 and 99.6% in 3Q17).
  • In addition, overall 3Q18 NPI was impacted by contribution to the sinking fund for upgrading works at Suntec of c.S$4.8m, which has no impact on DPU. Excluding this impact, 3Q18 NPI would have only fallen 4% y-o-y.

Suntec City Mall continues its turnaround

  • The recovery in Suntec City Mall’s back of foot +5.5% y-o-y for 9M18 although down from +8.5% y-o-y for 1H18 due to a high tenants’ firmer removal of secondary corridors.
  • 3Q18 revenue for the property rose impact of sinking fund contribution to the sinking fund of c.S$2.1m fallen by 2.4%.
  • With the opening of additional market indoor from Finland, we expect the further Suntec City Mall's value proposition the next few quarters.
  • We understand Suntec REIT was able to double-digit single digits in the prior quarter, which support higher coming year.
  • Post the renewal of only 2.3% of retail leases are renewed for the remainder of FY18, with another 264.9% at end-2Q18).

Transitional vacancy at Suntec City Office

  • While committed occupancy at Suntec City Office remains high at 99.6% vs 99.7% in 2Q18 and 98.4% in 3Q17, due to some tenants only physically moving in at the end of the year, 3Q18 revenue and NPI fell 4.4% and 12.1% y-o-y respectively. Excluding the impact of the sinking fund contribution, NPI would have fallen by 1.1% y-o-y.
  • On the back of leases signed over the quarter, only 2.1% and 10.9% of leases by NLA are up for renewal for the remainder of FY18 and FY19 respectively, down from 5.1% and 14.0% at end-2Q18.
  • Going forward, we expect earnings contribution to improve sequentially as physical occupancy improves and the impact of higher signing rents. For the quarter, committed rents achieved stood at S$9.05 psf/mth, up from S$8.95 psf/mth in 2Q18 and S$8.35 psf/mth in 2Q17.
  • While rental reversions for Suntec City Office was slightly up in 3Q18, for FY19, assuming Grade A spot office rents continue their upward trajectory (currently S$10.45 psf/mth), we expect Suntec to report stronger numbers given signing rents three years ago ranged from S$8.52-8.78 psf/mth.

Depreciation of AUD to be tempered by higher occupancies going forward

  • Although committed occupancy at 177 Pacific Highway remained at 100%, 3Q18 revenue and NPI fell 22.2% and 21.9% y-o-y respectively. The decline was attributed to the depreciation to the AUD. In addition, we understand 3Q17 revenue and NPI were elevated as Suntec REIT had recorded higher recoveries from tenants owing to undercharging in the prior Australian financial year (1 July to 30 June).
  • Meanwhile, JV income from Southgate increased 188.9% y-o-y largely due to Suntec’s higher interest in the property at 50%, up from 25%.Excluding the larger stake, we estimate that on a same-store basis, NPI would still have increased by 44% y-o-y. This is largely due to high occupancy at Southgate office which now stands at 96.8%, up from 89.6% at end- 3Q17 and 92.7% at end-2Q18. Post balance date, we understand Suntec REIT has entered into a heads of agreement for an additional 2.0% of NLA.
  • For Olderfleet (477 Collins Street), construction remains on schedule for completion in mid-2020 with another 16.2% of NLA having a heads of agreement signed, taking pre-committed occupancy for the building to 65.8%.

Stable gearing with marginal increase in borrowing costs

  • Gearing remains stable at around 36.8%. However, Suntec REIT’s all-in financing costs inched up to 2.86% from 2.74% in the preceding quarter.
  • On the back of higher shares on issue, adjusted NAV per unit fell to S$2.057 from S$2.076.

Maintain BUY, Target Price of S$2.30

  • We retain our bullish stance on Suntec REIT as spot office rents are expected to maintain their upward trajectory due to limited new supply over the coming 2-3 years translating into higher rental income going forward. In addition, we believe the turnaround of Suntec City Mall is sustainable given continued growth in footfall and tenant sales translating into robust rental reversions.
  • Thus, we maintain our BUY call and Target Price of S$2.30.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2018-10-24
SGX Stock Analyst Report BUY MAINTAIN BUY 2.300 SAME 2.300