Suntec REIT - CGS-CIMB Research 2019-01-23: Performance On Track


Suntec REIT - Performance On Track

  • Suntec REIT’s 4Q/FY18 DPU of 2.59/10.005 Scts is within our expectations, at 26%/100% of our full-year forecast.
  • Mixed office performance while retail continues to improve.
  • Maintain ADD with an unchanged Target Price of S$2.06.

4Q18 results highlights

  • SUNTEC REAL ESTATE INV TRUST (SGX:T82U, Suntec REIT)’s 4Q18 DPU of 2.59 Scts was in line. While 4Q revenue/NPI grew 7%/2.3% y-o-y, led by higher contribution from Suntec Singapore, 177 Pacific Highway and Suntec Mall, higher interest expenses eroded distribution income.
  • With a higher capital top-up of S$12.5m, 4Q18 DPU slipped a marginal 0.5% y-o-y. Similarly, for FY18, DPU dipped a slight 0.2% y-o-y to 9.988 Scts, after accounting for a larger S$39m capital distribution.
  • Suntec REIT also revalued its portfolio value up by 3.2%, translating to a BV of S$2.103/unit.

Mixed office performance

  • Suntec REIT’s FY18 office revenue fell y-o-y due to lower portfolio occupancy of 98.7% at end-18, -0.5% pt y-o-y as take-up at Suntec office and ORQ fell to 98.6% and 96.1%. Nonetheless, Suntec office enjoyed a positive rental reversion of 3% in FY18 and achieved an average of S$9.14psf/mth for 4Q18, +13.8% y-o-y with demand coming from banking, financial services and TMT sectors.
  • Meanwhile, the Australian portfolio enjoyed higher contributions thanks to additional income from a higher 50% stake in Southgate Complex.
  • Looking ahead, Suntec REIT has a remaining 8.2% and 17.6% of NLA to be renewed in FY19 and FY20. This will enable the trust to continue to benefit from the office upcycle.
  • Furthermore, completion of the 9 Penang Rd redevelopment and 477 Collins St project by end-2019 and mid-2020 should also increase Suntec REIT’s exposure to the office sector.

Improving retail operating metrics

  • Suntec REIT renewed/leased a total of 372k sq ft of retail space in FY18 and achieved portfolio occupancy of 99.1% at end-18. Shopper footfall rose 4.8% y-o-y while tenant sales registered a 5.2% improvement y-o-y.
  • Going forward, with its repositioning largely completed, Suntec REIT will continue to engage shoppers via its rewards programme as well as offering value added services.

Lower gearing of 38.1%

  • Suntec REIT’s gearing stood at 38.1% at end-FY18 with an average debt maturity of 3.2 years. In addition, 75% of its debt is on fixed rates. In addition to capital management, Suntec REIT plans to explore acquisition opportunities, particularly within its current geographic footprint.
  • Furthermore, management also signaled its medium-term intention to manage down the proportion of capital distribution, currently making up c.15% of its FY18 DPU. We would view this positively when it materialises.

Maintain ADD

  • We tweak our FY19-20 DPU estimates by 0.8-0.6% post results and maintain our ADD rating and DDM-based Target Price of S$2.06.
  • We anticipate with improved retail offerings at Suntec Mall, office revenue is likely to improve with the rental upcycle.
  • Re-rating catalysts include faster-than-expected office and retail rental hikes; downside risks include slower economic growth which could impact the demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | 2019-01-23
SGX Stock Analyst Report ADD MAINTAIN ADD 2.060 SAME 2.060