• 3Q19 DPU -5.1% YoY
• Lower capital top-ups
• Strong rental reversions

3Q19 Results Within Our Expectations

Suntec REIT reported its 3Q19 results which met our expectations. Gross revenue and NPI grew 3.5% YoY and 3.2% YoY to S$91.9m and S$58.4m, respectively. The main growth driver came from the Suntec City and Retail segments, but partially offset by weaker Convention contribution. DPU fell 5.1% YoY to 2.365 S cents, but this was due once again to a lower distribution from capital (-38.0% to 0.232 S cents). DPU from operations rose 0.8% YoY to 2.133 S cents.

Double-digit Rental Reversions Achieved for SG Office

Committed occupancy for Suntec City Office came in almost full at 99.9% (+0.8 ppt QoQ). Average gross rent also grew marginally from S$8.51 psf/month in 2Q19 to S$8.53 psf/month in 3Q19, as committed rents in 3Q19 came in at S$9.50-11.00 psf/month, versus an average expired rental of S$8.19. We believe rental reversions were >20% in 3Q19, and this was also the sixth consecutive quarter of positive rental reversions for Suntec City Office property.

Positive double-digit rental reversions for leases signed at One Raffles Quay and the MBFC Properties were also achieved in 3Q19. However, similar to the other office REITs, management highlighted that the outlook has dampened given more cautious sentiment in the market, although rental reversions would likely remain positive in the near-term.

As for the much talked about co-working business, WeWork currently contributes only 2.9% of Suntec REIT’s Singapore portfolio rental income. We understand that WeWork’s underlying utilisation at Suntec Tower 5 is ~98%, and rental payment has been prompt.

On the retail front, Suntec City Mall saw a moderation in operating metrics in 3Q19. 9M19 rental reversions were positive at 4.4%, as compared to +5.3% in 1H19. Tenants’ sales psf rose 0.8% in 9M19, softer than the 1.7% growth registered in 1H19. Footfall was stable (+3.8% in 9M19 versus +3.9% in 1H19).

Looking ahead, management is targeting rental reversions of 3-5% at Suntec City Mall over the next year. Occupancy costs for Suntec City Mall are at ~22-23%.

Exploring New Markets for Growth?

Besides its current core markets of Singapore and Australia, we understand that Suntec REIT is also exploring new markets to drive its growth, with the London office market a possible destination. NPI yields could range 4.3-4.5% there.

Suntec REIT is potentially targeting overseas properties to form ~30-40% of its AUM in 3-5 years’ time. We lower our FY19F and FY20F DPU forecasts slightly by 0.9% and 1.0%, respectively. Our fair value inches down from S$2.07 to S$2.05. Maintain BUY.

Source: OCBC Research - 24 Oct 2019