• Maintain NEUTRAL, unchanged SGD1.90 Target Price offers 1% upside plus 5% FY19F yield. SUNTEC REAL ESTATE INV TRUST (SGX:T82U)’s 4Q18/FY18 DPU are in line with our estimates.
• 4Q18 revenue grew 7% y-o-y on better contributions from Suntec City mall, its convention centre business and 177 Pacific Highway. NPI rose by a smaller 2.3% y-o-y due to the SGD4.8m sinking fund contribution for Suntec City office.
• Operational DPU dipped 3.5% y-o-y on higher finance costs (+28%), offsetting NPI gains. There was a higher capital distribution of SGD12.5m and SGD39m for the quarter and full year, which helped DPU to stay flattish vs last year.
• Management guided that it still has about ~SGD70m in divestment gains available from the sale of Park Mall, which will be used to offset any shortfall in the coming quarters until operational DPU stabilises.

New CEO

• Mr Chong Kee Hiong has taken over the role of CEO with the departure of Mr Chan Kong Leong at the end of 2018. Mr Chong has over 25 years of work experience, with recent jobs being CEO of OUE HOSPITALITY TRUST (SGX:SK7) and CEO of The Ascott Limited prior to that.

Positive Outlook on Rental Rates for Suntec’s Retail and Office Space

• The strong rebound in office rental rates and repositioning of the retail mall has benefitted Suntec REIT, with Suntec City Office and retail seeing positive rentals reversions of 10% and 3% for 2018. The overall office occupancy rate dipped to 98.7% (FY17: 99.2) while the retail occupancy rate rose 0.3ppt to 99.1%.
• About 8% and 25% of office and retail leases are due for renewal in 2019. Management has an upbeat outlook and guided for a 3-5% positive rental reversion for office leases and a 5% increase for its expiring retail rentals for this year

Development Assets Update

• Construction of 9 Penang Road, Singapore (a Grade A commercial building) – in which Suntec REIT has a 30% stake – is 60% done, with completion expected in end-2019. Management stated that it is now in advanced discussions with a few major tenants, but no leases have been signed yet.
• In Australia, its Olderfleet, Melbourne asset is on-track for completion by mid-2020. Leasing progress has been healthy, with 66% of the NLA pre-committed – heads of agreement signed for another 16% of the space. Committed rental rates are in line with the market, at AUD600psm pa.

Might Look for Acquisitions to Boost Operational DPU

• The manager noted that it will be looking at acquisition opportunities to bolster operational DPU and highlighted Australia as a key potential market. Melbourne and Sydney – where Suntec REIT already has a presence – will be preferred target destinations, but it is also open to considering core-CBD assets in other key Australian cities.
• We believe Suntec REIT might potentially look at acquiring the remaining 50% stakes in Olderfleet and Southgate Complex in the near term.
• With gearing at 38.1%, we see limited debt headroom, and future acquisitions are likely to be a combination of equity and debt.

Suntec Has Been Actively Redeveloping and Revamping Its Assets, But Effects Are Likely Seen Only From 2H20 Onwards

• Valuations are fair, in our view, with the stock offering a 5% FY19F yield. Our DDM-derived Target Price is based on CoE of 7.5% (risk-free rate: 3%) and terminal growth of 2%.
• Key share price catalysts are the successful completion of asset enhancements and yield-accretive acquisitions.
• The key risk is the prolonged downturn in Singapore’s office and retail markets.

Source: RHB Invest Research - 24 Jan 2019