Suntec REIT - OCBC Investment 2019-07-29: More Positive Outlook Ahead

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - More Positive Outlook Ahead

Suntec REIT (SGX:T82U) reported its 2Q19 results which met our expectations. Gross revenue and NPI fell 2.3% and 7.2% y-o-y to S$88.4m and S$56.4m, respectively. This was due to lower convention revenue and a sinking fund contribution of S$3.2m which has no impact on Suntec REIT's distributable income.
DPU fell 4.6% y-o-y to 2.361 S cents as a result of a lower distribution from capital (-38.1% to 0.232 S cents). However, it was noteworthy that DPU from operations actually rose 1.4% y-o-y to 2.129 S cents.
For 1H19, Suntec REIT's NPI was down 7.4%, while DPU of 4.795 S cents represented a decline of 2.3% and represented 49.0% of our FY19 forecast.

Operationally, Suntec REIT had a good quarter on the rental reversions front. Committed rents at Suntec City Office came in at S$8.92-S$11.00 psf/month in 2Q19, versus average expired rents of S$8.52 psf/month.
From our understanding, rental reversions were solid at +7.9%. Rental uplifts were also recorded at One Raffles Quay and MBFC Properties and momentum is expected to be sustained in 2H19. For retail, Suntec City Mall's committed occupancy stood at 98.3%, while positive rental reversions of 5.3% were achieved in 1H19.
Looking ahead, management is targeting rental reversions to remain around the mid-single digit level. Footfall and tenants' sales psf for the mall rose 3.9% and 1.7% in 1H19, respectively.
Another positive from Suntec City Mall arose from the AEI at basement 1 (~15k sq ft). New units have started trading from end Jun and ROI is estimated to be ~50%.

Suntec REIT has proposed acquisitions of two high quality freehold Grade A assets in Jul.
The first is 21 Harris Street in Sydney. It is still under development, with expected completion in 1Q20. Acquisition cost of ~A$297m is expected to be paid after practical completion. Initial NPI yield is estimated to be 5.5%, with annual rent escalation of 3%-4%.
The second property is 55 Currie Street in Adelaide. The purchase consideration of S$148.3m is expected to provide an initial NPI yield of 8.0%, with annual escalations of 3.5%-3.75%.
After adjustments (lower risk-free rate and higher terminal growth assumptions), we bump our fair value estimate from S$1.83 to S$2.07. Upgrade from HOLD to BUY.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-29

SGX Stock Analyst Report BUY UPGRADE HOLD 2.07 UP 1.830