• Suntec REIT’s 3Q/9M DPU of 2.491/7.398 Scts were within our expectations at 25%/74% of our FY18F forecast.
• We expect office revenue to benefit from the rental upcycle, while improving retail offerings should drive up Suntec Mall’s traffic and sales.
• Maintain ADD with slightly lower Target Price of S$2.06.

3Q18 results highlights

• Suntec REIT reported an 11.4% y-o-y decline in 3Q net property income to S$56.4m on a 2.5% y-o-y lower revenue due to higher sinking fund contributions for Suntec Office upgrading works. However, 3Q distributable income rose 1% y-o-y to S$66.5m (DPU: 2.491 Scts) thanks largely to a capital top-up of S$10m.
• For 9MFY18, DPU came in at 7.398 Scts, accounting for 74% of our FY18F forecast.

Office revenue dragged by transitory downtime and weaker forex

• 3Q18 office revenue fell on lower income from Suntec office and 177 Pacific Highway, (weaker A$) due to transitory downtime for replacement leases and the weaker A$. The trust signed 268k sqft of leases in 3Q. Portfolio occupancy was 98.9% at end-3Q18.
• Suntec office achieved a slightly higher average rent of S$9.05psf with more bite-sized demand coming from TMT, shipping, energy and natural resources sectors. Suntec REIT has a remaining 2.1% and 10.9% of office leases to be re-contracted in FY18 and FY19, enabling them to ride on the current office rental upcycle.
• To further enhance Suntec office, upgrading works of its lobbies and washrooms are scheduled to start in 4Q18.

• Suntec REIT signed 73k sqft of retail leases in 3Q and achieved committed occupancy of 98.6% for its Singapore portfolio.
• Suntec Mall shopper traffic increased an all-in-one indoor activity park, will be opening its first Southeast Asian outlet in Nov 18 at Suntec Mall as well as Old Town White Coffee.

Development projects on track

• Steel and structure works are in progress at level 9 of 9 Penang Rd, while slab works have reached level 16 at 477 Collins St. Pre-committed occupancy at the latter has increased to 65.8%, with an additional 16.2% of space with Heads of Agreement signed to-date. These properties are expected to add to Suntec REIT’s income stream when completed in 2019 and 2020, respectively.

• We leave our FY18-20F DPU estimates unchanged to S$2.06 to factor in a slightly higher cost of equity of 7.6%.
• We anticipate improved activities, while office revenue is likely to rise in tandem with the rental upcycle.
• The impact of rising interest rates is on fixed rates.
• Upside risk includes faster-than-projected rise in office and retail interest rate hike.