• 1Q18 DPU +0.3% YoY
• Office rents picking up
• Footfall and tenants’ sales continue to impress

1Q18 Results Within Our Expectations

Suntec REIT reported its 1Q18 results which met our expectations. Gross revenue rose 2.6% YoY to S$90.7m, while NPI grew 1.9% to S$63.0m. The latter formed 25.1% of our FY18 forecast. Growth was underpinned by higher revenue from Suntec Singapore and an increase in retail revenue from Suntec City mall, but partially offset by weaker office revenue.

DPU for the quarter was flat (+0.3% YoY) at 2.433 S cents and constituted 24.2% of our full-year forecast; but was once again boosted by a higher distribution from capital of S$6.5m (1Q17: S$3.0m).

Underlying Operations Appear Firmer

Overall portfolio occupancy was firm for its office (99.1%) and retail (98.4%) segments. Average rents of S$9.02 psf/month and S$8.95 psf/month were secured for its Singapore office portfolio and Suntec City office, respectively. This was a robust 6.1% and 11.5% QoQ increase, respectively, reversing two consecutive quarters of sequential decline.

We believe rental reversions were flattish in 1Q18, an improved situation as reversions were likely negative in FY17. We expect office spot rents to continue its upward trajectory this year, which augurs well for Suntec REIT.

An AEI will also be carried out to upgrade Suntec City Office’s lift lobbies and washrooms in phases beginning 4Q18 for a three-year period. On the retail front, operating metrics for Suntec City Mall were also bright, with footfall increasing 12.7% YoY and tenants’ sales psf improving 5.2% YoY.

Share Price Has Corrected Sharply

Since our downgrade to a ‘Sell’ on 24 Jan 2018 and as of the closing price of S$1.90 on 25 Apr, Suntec REIT’s share price has corrected 11.6%. We believe valuations are less demanding than before, with Suntec REIT now trading at FY18F distribution yield of 5.3%. We factor in Suntec REIT’s acquisition of an additional 25% interest in Southgate Complex and raise our fair value from S$1.81 to S$1.84

Source: OCBC Research - 26 Apr 2018