• 4Q19 DPU -9.4% YoY
• Rental reversions remain firm
• Expect DPU recovery in FY20

4Q19 Results Within Our Expectations

Suntec REIT reported its 4Q19 results which met our expectations. Gross revenue and NPI grew 3.5% YoY and 4.2% YoY 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. DPU fell 9.4% YoY 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% YoY to 2.124 S cents. 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 QoQ 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 precommitted), 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

Source: OCBC Research - 28 Jan 2020