Suntec REIT - DBS Research 2020-01-23: Suntec City Office Shines


Suntec REIT - Suntec City Office Shines

  • Suntec REIT's 4Q19 DPU fell 9.4% y-o-y to 2.347 Scts due to lower capital distributions; underlying 4Q19 DPU relatively stable led by Suntec City Office, offset by lower associate earnings, higher expenses and weaker AUD.
  • Suntec City Office hit 100% occupancy; expect double digit reversions to continue.
  • Suntec City Mall achieved operational improvements.
  • Maintain BUY; S$2.15 Target Price.

Market turning around to our expectations.

Suntec City Office shines

4Q19 DPU fell due to lower capital distributions, as expected; underlying 4Q19 DPU -0.4% y-o-y.

  • Suntec REIT delivered 4Q19 DPU of 2.347 Scts which dropped 9.4% y-o-y following lower capital distributions as per last quarter. FY19 DPU fell 4.8% y-o-y to 9.507 Scts, above our FY19F estimates.
  • Stripping out S$6.5m (flat q-o-q; S$12.5m in 4Q18) worth of capital gains, underlying 4Q19 DPU was 0.4% y-o-y lower at 2.116 Scts. In FY19, excluding capital gains of S$26m (S$39m in FY18), underlying DPU was marginally 0.5% y-o-y higher.
  • 4Q19 Revenue and NPI grew 3.5% y-o-y and 4.2% y-o-y to S$96.7m and S$63.3m respectively, with increased contribution at Suntec City Office (NPI +4.5% y-o-y), Suntec Convention (NPI +31.7% y-o-y) and maiden contributions from 55 Currie Street (acquisition completed on 10 Sep 19).
  • Excluding the sinking fund at Suntec City of c. S$4.9m (vs S$4.8m in 4Q18) which does not impact actual distribution to unitholders, underlying 4Q19 NPI grew 4.1% y-o-y to S$68.2m.
  • Suntec REIT’s associate earnings was 1.8% y-o-y lower due to a drop in contributions from all properties (mainly from MBFC) except Southgate. Earnings from MBFC Towers 1 &2 fell 3.4% y-o-y to S$11.5m from lower occupancy (98.5% vs 100% in 4Q18), while One Raffles Quay’s contribution fell 1.8% y-o-y to S$5.4m and MBLM’s contribution fell 18.2% y-o-y to S$0.9m from lower occupancy (97.7% to 99.2%). Contribution from Southgate (office & retail) increased 7% y-o-y to S$4.6m from higher occupancy (office: 100% vs 98.8% in 4Q18; retail: 92.8% vs 90.9% in 4Q18).
  • Valuation of its properties increased by S$168m mainly from the completion of 9 Penang Road and Suntec City Office due to 15bps cap rate compression.

Suntec City Mall continues to see operating improvements; expect high single digit reversions.

  • Suntec City Mall’s 4Q19 revenue grew 6.1% y-o-y but NPI fell 6.7% y-o-y due to higher advertising and promotion expenses, and property tax. However, operations held up with positive rental reversions (FY19 +5.1%; 4Q19 estimated +7.7%) and relatively stable occupancy q-o-q and y-o-y of 99.6% vs 98.3% in 3Q19 and 99.6% in 4Q18
  • FY19 foot traffic was healthy, up 3.9%, but slightly lower compared to 4.8% y-o-y in FY18.
  • FY19 tenant sales growth slowed marginally to 0.7% y-o-y from 5.2% for FY18. The softer tenant sales performance, we believe was due to a high base effect following c.5% y-o-y growth over the last 2 years. Nevertheless, FY19 tenant sales growth was mainly driven by F&B (+4.8%) offset by decline in other trades such as fashion (-1.2%) and lifestyle (-0.6%).
  • Approximately 40% of the leases will be expiring in FY2020, of which 5% have already been renewed. The expiring leases comprise largely anchor tenants. Management is confident to renew these leases as tenants are keen to stay but may try to stagger the expiry of these leases in the next cycle.
  • Following the AEI works at basement 1, Suntec City Mall has achieved rent increase of 56%. Management expects high single digit rental reversions to continue.

Suntec City Office hit 100% occupancy and double digit rental reversions expected.

  • Suntec City Office 4Q19 revenue and NPI grew 4.6% y-o-y and 4.1% y-o-y from higher rents and higher occupancy (100% versus 98.6%)
  • Suntec City Office has had 7 consecutive quarters of positive rental reversions as signing rents of S$9.30 psf/mth to S$11.00 psf / mth is above CBRE’s 4Q19 Grade B core CBD rent of S$8.70. The estimated average signing rent of S$10.15 psf / mth is up from S$9.14 psf/mth in 4Q18 but slightly lower than S$10.25 psf /mth in 3Q19
  • In addition, based on average signing rents of S$8.55 psf/mth in FY16 and FY17, Suntec City Office is expected to deliver positive rental reversions in the near term at possibly high single digit to low double digit levels.
  • Two-thirds of the vacancy from the relocation of UBS at Suntec City Office has been back-filled. Discussions are underway for the remaining space and management continues to expect double digit rental reversions given the low expiring rents.

Lower gearing; stable borrowing costs.

  • Aggregate leverage fell to 37.7% vs 38.2% in 3Q19 and 38.1% in 4Q18.
  • Suntec REIT’s all-in cost of debt increased marginally q-o-q to 3.05% vs 3.01% in 3Q19.
  • NAV per unit increased to S$2.126 from S$2.103 at end 4Q18.

Key updates

  • 9 Penang Road obtained TOP in Oct19. UBS is expected to move in 2H2020.
  • Olderfleet, 477 Collins Street topped out its building structure on 31 July 2019, fit-out works are in progress, on track for scheduled completed in mid-2020. Pre-committed leases inched up to 93.2% (from 87% in 3Q19) with additional 2.4% with heads of agreement (HOA)
  • The acquisition of 21 Harris Street, Pyrmont, Sydney is expected to complete by end Mar 2020. Pre-committed occupancy remains at 65% to-date with additional 15% under HOA. It has 3-year rent guarantee for remaining unlet spaces.
  • Backfilling of space due to UBS vacancy at ORQ is ongoing with 1.5 floors filled, unchanged since last quarter. However, management expects more leasing activities this year to fill up the vacancy.
  • Management expects to maintain its rebased capital distributions moving forward on stable economic outlook with underlying DPU to drive growth.
  • See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Maintain BUY; Target Price of S$2.15

  • We maintain our BUY rating and Target Price of S$2.15 on Suntec REIT. We revised our FY20F-FY21F earnings by 3% to 6% to factor in a stable y-o-y capital distributions of S$26m in FY20F and the remaining S$14m in FY21F.
  • The lowered capital distribution and DPU expectations may see some near-term overhang in share price performance, but we believe with more evidence of improving underlying performance and sustainable growth trajectory, Suntec REIT will be able to deliver DPU growth in the future.

Rachel TAN DBS Group Research | Derek TAN DBS Research | 2020-01-23
SGX Stock Analyst Report BUY MAINTAIN BUY 2.150 SAME 2.150