Suntec REIT - CGS-CIMB Research 2019-04-24: Stronger Retail Showing

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Stronger Retail Showing

Suntec REIT's 1Q19 DPU of 2.434 Scts was in line, accounting for c.24% of our FY19 forecast.
Better retail showing offset drag from convention business.
Maintain ADD with unchanged Target Price of S$2.06.

SUNTEC REIT (SGX:T82U) reported flat y-o-y 1Q19 DPU of 2.434 Scts despite lower gross revenue and net property income (NPI), offset by higher associate and JV contributions, greater finance income and capital top-up of S$6.5m (unchanged y-o-y).
Topline fell 1.1% y-o-y due to lower convention income from Suntec Singapore on fewer convention events and weaker A$, partly offset by higher retail rents.
NPI was dragged by higher sinking fund contributions at Suntec City which lowered portfolio NPI margin to 65% (vs. 69.5% in 1Q18).

Suntec office continued to benefit from the rising office cycle, with a slight improvement in revenue as replacement leases secured in prior quarters commenced operations, partly moderated by a 0.2% point decline in occupancy. Suntec REIT renewed 63k sq ft of office space in 1Q19 at higher average rents of S$9.37psf, +2.5% q-o-q. The demand came from shipping and freight forwarding, trading and TMT sectors.
Overall, Suntec REIT has a remaining 6% and 17.6% of office leases expiring in FY19 and FY20, respectively, and should continue to ride the office upcycle.

Retail revenue from Suntec Mall improved on higher rents and occupancy although the NPI increase was moderated by higher sinking fund contributions. Shopper footfalls rose 3.3% y-o-y while tenant sales improved 1.3% over the same period. Suntec REIT renewed 50k sq ft of space in 1Q19 and has a remaining 19% and 32.4% of portfolio retail space to be re-contracted in FY19 and FY20, respectively.
Reconfiguration works to convert 5 shop units at the basement of Suntec Mall into multi F&B concepts have started and scheduled to complete in July 19. This should continue to drive footfalls as well as shopper spend, in our view.

Suntec REIT announced that the office component at 9 Penang Rd is 100% pre-leased to UBS, totaling 381k sq ft. The property is scheduled to complete in 4Q19 and the target occupation date for UBS is in 2H20. Pre-leasing for the 15k sq ft of ancillary retail space at the building is also ongoing.
Meanwhile, 76% of Olderfleet at 477 Collins St is pre-leased with an additional 13.1% with Heads of Agreement (HOA) signed. The latter is expected to be completed in mid-2020. This will strengthen Suntec REIT’s earnings visibility going forward.

We leave our FY19-21 DPU estimates unchanged and maintain our DDM Target Price of S$2.06.
Re-rating catalysts include faster-than-expected office and retail rental hikes; downside slower economic growth which could impact demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-24

SGX Stock Analyst Report ADD MAINTAIN ADD 2.060 SAME 2.060