Suntec REIT 2Q19 - UOB Kay Hian 2019-07-29: Drag From Less Capital Distribution

SUNTEC REAL ESTATE INV TRUST (SGX:T82U) | SGinvestors.io SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT 2Q19 - Drag From Less Capital Distribution

  • Suntec REIT (SGX:T82U) benefitted from the strong performance of Suntec City Mall. However, net property income declined 7.2% y-o-y due to sinking fund contribution for upgrading works at Suntec Office Towers.
  • Contribution from JVs increased 13.8% y-o-y due to Southgate Complex (office occupancy improved 6.8ppt y-o-y to 99.5% and additional 25% stake) and MBFC (one-off compensation from early termination).
  • Suntec REIT's 2Q19 DPU declined 4.6% y-o-y due to lower capital distribution.
  • Maintain HOLD. Target Price: S$2.02. Entry Price: S$1.84.



Suntec REIT 2Q19 RESULTS


Results in line with expectations.

  • Suntec REIT (SGX:T82U) reported 2Q19 DPU of 2.361 S cents (-4.6% y-o-y), bringing DPU to 4.795 S cents (-2.3% y-o-y). DPU from operations grew 1.4% y-o-y for 2Q19. However, DPU from capital distribution declined 38.1% y-o-y.

Retail: Continues to benefit from repositioning.

  • Revenue from Suntec City Mall increased 4.3% y-o-y in 2Q19. Footfall and tenants’ sales grew 3.9% and 1.7% y-o-y respectively in 1H19. Total leases for 77,000sf of retail space were signed in 2Q19 with positive rental reversion at 5.3%. Retention rate was stable at 64%.
  • Suntec REIT has commenced asset enhancement works at basement 1 for 15,000sf of retail space in Mar 19. The new units are expected to start contributing from Jun 19. Management expects rental reversion to sustain at a positive single-digit increase.

Office: Healthy occupancies across office portfolio.

  • Overall office occupancy stood at 99.1% (+0.2ppt q-o-q). Committed occupancy for Suntec City Office also improved 0.2ppt q-o-q to 99.1%. Leases with office NLA of 180,000sf were signed with positive rental reversion of 7.9% in 2Q19. Committed rents for Suntec City Office range from S$8.92psf to S$11.00psf, higher than average expired rents of S$8.52psf.
  • Renewal and new demand were mainly from Technology, Media & Telecommunications and Banking, Insurance & Financial Services. Balance of leases expiring in 2019 was reduced to only 1.6% of total office NLA.

Convention: Competition for hosting major events.

  • Revenue from Suntec Convention declined 22.7% y-o-y to S$14m due to fewer major events. Suntec Convention secured more corporate events but they were smaller in scale.
  • Maintenance charges increased 48% y-o-y to S$9.9m due to sinking fund contribution for upgrading works for common areas at Suntec Office Towers. Overall, property expenses increased 7.5% y-o-y. Thus, net property income declined 7.2% y-o-y.

Increased contributions from JVs.

  • Contribution from JVs increased by 13.8% y-o-y driven by Southgate Complex (committed office occupancy improved 6.8ppt y-o-y to 99.5% and additional 25% stake) and Marina Bay Financial Centre (MBFC) (one-off compensation from early termination by one tenant). MBFC maintained full occupancy.
  • Contribution from for One Raffles Quay (ORQ) dropped 6.7% y-o-y as committed occupancy declined 3ppt y-o-y to 97.0%.

Healthy balance sheet.

  • Gearing was improved marginally to 38.3% (-0.3ppt q-o-q). In Apr 19, Suntec REIT secured S$400m in 5-year loan facility and raised S$200m through private placement of 111.1m new units.


STOCK IMPACT


Singapore office portfolio set to perform well.

  • Management noted the stable leasing market and tight supply, which has led to tighter overall grade-A core CBD occupancy of 94.9% (+0.9 ppt q-o-q), and grade-A core CBD rents increasing to S$10.79psf pm (+1.5% q-o-q).
  • Suntec REIT is expected to sustain positive reversions for the Singapore office portfolio in 2H19 and 2020. The average expiring rent for MBFC and ORQ is estimated at below S$9.00psf (expiring leases signed years ago when market conditions were unfavourable) for 2020.

9 Penang Road starts to contribute in 2H20.

  • For projects under development in Singapore, 9 Penang Road is on track to complete construction works by 4Q19. The office component has been 100% pre-leased to UBS (occupying all eight office floors with NLA of 381,000sf starting 2H20), and leasing for 15,000sf of retail NLA is on-going.

More office AEI works to come.

  • Management will continue with proactive asset management to strengthen their office portfolio. Ongoing works at Suntec City Office upgrading will fully complete in 2021 (main lobby, lift lobby and washrooms), which will further enhance Suntec City’s competitiveness and meet tenants’ needs.

Scaling up in overseas markets.

  • Suntec REIT has to look overseas for opportunities to expand due to lack of acquisition pipeline domestically in Singapore. It will focus on developed markets. Management is keen to scale up in Australia as sponsor ARA has a ground presence for asset management and property management. Management is also open to explore opportunities in gateway cities in Europe, such as London, Paris, Frankfurt and Munich.
  • Overseas markets have expanded from 11% to 23% of AUM post acquisitions of 21 Harris Street and 55 Currie Street. Management aims to expand the proportion of overseas AUM to 30-40% over the next five years.


EARNINGS REVISION/RISK

  • We have fine-tuned our 2019F-21F DPU by -0.8% to 0.8%, factoring in fresh contributions from 55 Currie Street and impact from placement of 111.1m new units.


VALUATION/RECOMMENDATION

  • Maintain HOLD with target price raised to S$2.02 (previously: S$2.00), based on DDM (required return: 6.25% and terminal growth of 1.5%). Entry price is S$1.84.


SHARE PRICE CATALYST

  • Contributions from yield accretive acquisitions.
  • Positive newsflow on office and retail capital values, AEI, tenant movements and renewals, and occupancy.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-29
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.02 UP 2.000



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