• Suntec REIT's 1Q19 DPU of 2.434 Scts was in line, accounting for 24% of our FY19 forecast.
• Better retail showing offset drag from convention business.
• Maintain ADD with unchanged Target Price of S$2.06.

Suntec REIT's 1Q19 Results Highlights

• SUNTEC REIT (SGX:T82U) reported flat y-o-y 1Q19 DPU of 2.434 Scts despite lower gross revenue and net property income (NPI), offset by higher associate and JV contributions, greater finance income and capital top-up of S$6.5m (unchanged y-o-y).
• Topline fell 1.1% y-o-y due to lower convention income from Suntec Singapore on fewer convention events and weaker A$, partly offset by higher retail rents.
• NPI was dragged by higher sinking fund contributions at Suntec City which lowered portfolio NPI margin to 65% (vs. 69.5% in 1Q18).

Benefiting From Rising Office Cycle

• Suntec office continued to benefit from the rising office cycle, with a slight improvement in revenue as replacement leases secured in prior quarters commenced operations, partly moderated by a 0.2% point decline in occupancy. Suntec REIT renewed 63k sq ft of office space in 1Q19 at higher average rents of S$9.37psf, +2.5% q-o-q. The demand came from shipping and freight forwarding, trading and TMT sectors.
• Overall, Suntec REIT has a remaining 6% and 17.6% of office leases expiring in FY19 and FY20, respectively, and should continue to ride the office upcycle.

Improved Retail Performance on Higher Footfalls and Sales

• Retail revenue from Suntec Mall improved on higher rents and occupancy although the NPI increase was moderated by higher sinking fund contributions. Shopper footfalls rose 3.3% y-o-y while tenant sales improved 1.3% over the same period. Suntec REIT renewed 50k sq ft of space in 1Q19 and has a remaining 19% and 32.4% of portfolio retail space to be re-contracted in FY19 and FY20, respectively.
• Reconfiguration works to convert 5 shop units at the basement of Suntec Mall into multi F&B concepts have started and scheduled to complete in July 19. This should continue to drive footfalls as well as shopper spend, in our view.

9 Penang Rd Office Fully Pre-committed

• Suntec REIT announced that the office component at 9 Penang Rd is 100% pre-leased to UBS, totaling 381k sq ft. The property is scheduled to complete in 4Q19 and the target occupation date for UBS is in 2H20. Pre-leasing for the 15k sq ft of ancillary retail space at the building is also ongoing.
• Meanwhile, 76% of Olderfleet at 477 Collins St is pre-leased with an additional 13.1% with Heads of Agreement (HOA) signed. The latter is expected to be completed in mid-2020. This will strengthen Suntec REIT’s earnings visibility going forward.

Maintain ADD

• We leave our FY19-21 DPU estimates unchanged and maintain our DDM Target Price of S$2.06.
• Re-rating catalysts include faster-than-expected office and retail rental hikes; downside slower economic growth which could impact demand for office space.

Source: CGS-CIMB Research - 24 Apr 2019