Suntec REIT - OCBC Investment 2020-01-28: Starting From A Fresh Base In FY20


Suntec REIT - Starting From A Fresh Base In FY20

  • Suntec REIT's 4Q19 DPU -9.4% y-o-y.
  • Rental reversions remain firm.
  • Expect DPU recovery in FY20.

Suntec REIT's 4Q19 results within our expectations

  • SUNTEC REIT (SGX:T82U) reported its 4Q19 results which met our expectations. Gross revenue and NPI grew 3.5% y-o-y and 4.2% y-o-y to S$96.7m and S$63.3m, respectively. This was driven largely by Suntec City Office, Suntec Convention and contribution from 55 Currie Street. See Suntec REIT Announcements.
  • 4Q19 DPU fell 9.4% y-o-y to 2.365 S cents, due largely to a lower distribution from capital (- 50.4% to 0.231 S cents). DPU from operations declined 0.4% y-o-y to 2.124 S cents. See Suntec REIT Dividend History.
  • For FY19, Suntec REIT’s NPI and DPU declined 2.0% and 4.8% to S$236.2m and 9.507 S cents, respectively, with the latter accounting for 98.8% of our full-year forecast.

Positive rental reversions; higher portfolio valuation

  • Suntec REIT delivered robust rental reversions of 18% and 13% for Suntec City Office in 4Q19 and FY19, respectively. It disclosed that Suntec City Office’s average expiry rents for FY20 and FY21 are S$8.90 and S$8.70 psf/month, respectively. We believe this augurs well for its rental reversion prospects, given its ongoing AEI to revitalise the asset, and that its last committed rents were S$9.30-11.00 psf/month in 4Q19.
  • For retail, Suntec City Mall’s committed occupancy was 99.6%, while the mall clocked in 10 consecutive quarters of positive rental reversions (FY19: +5.1%). Footfall and tenants’ sales (psf/month) grew 3.9% and 0.7% (+3.2% if we exclude SuperPark) in FY19, respectively. The latter was led by F&B (+4.8%), but there was weakness from Fashion (-1.2%) and Lifestyle (-0.6%).
  • Looking ahead, Suntec REIT has 35% of its retail leases expiring in FY20. Management highlighted that high single-digit rental reversions are possible in FY20.
  • In terms of portfolio valuation, Suntec REIT registered S$154.4m of fair value gains in FY19, driven largely by Suntec City Office and Retail and its Australian properties despite a weaker AUD. As a result of Suntec REIT’s revaluation gains, its aggregate leverage ratio declined 0.5 ppt q-o-q to 37.7%.

Ease DPU projections, but still expecting 3.3% growth in FY20

  • We lower our FY20F and FY21F DPU forecasts by 2.9% and 2.5%, respectively, as we now forecast a slower-than-expected backfilling of the space to be vacated by UBS at ORQ (currently only 1.5 out of the 12 floors to be vacated have been pre-committed), coupled with weaker Convention margins and lower AUD to SGD assumption (~30% of AUD income hedged for 2020 as at 31 Dec 2019), but partially offset by a lower cost of debt.
  • Nevertheless, our revised forecasts still translate into 3.3% DPU growth in FY20. After rolling forward our valuations, our fair value remains unchanged at S$2.05. See Suntec REIT Share Price; Suntec REIT Target Price.
  • Maintain BUY.

OCBC Research Team OCBC Investment Research | 2020-01-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.05 SAME 2.05