• SUNTEC REIT (SGX:T82U)'s 3Q19 DPU fell 5% y-o-y to 2.365 Scts due to lower capital distributions as per previous quarter; 9M19 DPU fell 3.2% y-o-y to 7.16 Scts, at 79.5% of our estimate.
• Underlying 3Q19 and 9M19 DPU grew 0.8% y-o-y to 2.133 Scts and 6.454 Scts respectively.
• Both the office and retail properties of Suntec City achieved strong positive rental reversions which are expected to persist.
• Maintain BUY; Target Price of S$2.15.

What’s New

3Q19 DPU fell due to lower capital distributions as expected; underlying 3Q19 DPU inched up 0.8% y-o-y

• Suntec REIT delivered 3Q19 DPU of 2.365 Scts which was down 5% y-o-y following lower capital distributions as per last quarter. 9M19 DPU fell 3.2% y-o-y to 7.16 Scts, at 79.5% of our FY19F estimate due to our lower estimated capital distributions for the year. (See Suntec REIT Dividend History; Suntec REIT Announcements)
• Stripping out S$6.5m (flat q-o-q) worth of capital gains (S$10m in 3Q18), underlying 3Q19 DPU inched up 0.8% y-o-y to 2.133 Scts. On 9M19, excluding capital gains of S$19.5m (S$26.5m in 9M18), underlying DPU also increased 0.8% y-o-y.
• 3Q19 revenue and NPI grew 3.5% and 3.2% y-o-y to S$91.9m and S$58.4m respectively, with increased contribution at Suntec City Office (NPI +5% y-o-y), Suntec City Mall (NPI +3.1% y-o-y) and maiden contributions from 55 Currie Street (completed acquisition on 10 September 2019).
• Excluding the sinking fund at Suntec City of S$6.4m (vs estimated S$4.8m in 3Q18) which does not impact actual distribution to unitholders, the underlying 3Q19 NPI grew 5.7% y-o-y to S$64.8m.
• Suntec REIT’s DPU was also boosted by higher associate earnings (+14.2% y-o-y), on the back of better performance from all three properties, especially MBFC. Earnings from MBFC Towers 1 & 2 grew 17.7% y-o-y to S$14.6m from higher rental rates which offset lower occupancy (98.5% vs 100% in 3Q18), while One Raffles Quay’s contribution grew 5.2% y-o-y to S$6.1m from higher rental rates and occupancy ( 98.5% vs 96.1% in 3Q18). Contribution from Southgate Complex increased 11.8% y-o-y to S$3.8m from higher occupancy (90.9% vs 90% in 3Q18) and rents.

Suntec City Mall continues to see positive rental reversions; healthy occupancy, tenant sales and foot traffic

• City Mall continued its recovery with 3Q19 revenue and NPI increasing by 4.4% and 2.9% y-o-y to S$32.2m and S$21.2m respectively.
• The improved performance was due to positive rental reversions and relatively stable occupancy q-o-q and y-o-y of 98.3% in 3Q19 vs 98.3% in 2Q19 and 98.5% in 3Q18.
• Although the 4.4% rental reversion achieved in 9M19 is slightly lower compared to 5.3% in 1H19, management continues to expect positive rental reversions at single-digit levels.
• While 9M19 foot traffic remained healthy (up 3.8% y-o-y), it was slightly lower compared to 3.9% y-o-y in 1H19 and 4.8% y-o-y in FY18.
• 9M19 tenant sales growth slowed further to 0.8% y-o-y from 5.2% for FY18. The softer tenant sales performance, we believe may be due to a high-base effect following 5% y-o-y growth over the last two years.
• Nevertheless, 9M19 tenant sales growth was mainly driven by F&B (+6.1%) offset by decline in other trades (-1.7%) such as Entertainment and Home Furnishing.

Suntec City Office benefitting from six quarters of positive rental reversions; signing above-market rents

• Suntec City Office’s 3Q19 revenue and NPI grew 4% and 5% y-o-y respectively from higher rents and marginally higher occupancy (99.9% versus 99.6%).
• Suntec City Office has enjoyed six consecutive quarters of positive rental reversions with the signing rents of S$9.50-11.00 psf/month being above CBRE’s 3Q19 Grade B core CBD rent of S$8.70 psf/month. The estimated average signing rents of S$10.25 psf/month are up from S$9.14 in 4Q18, S$9.05 in 3Q18 and S$9.96 in 2Q19.
• In addition, based on average signing rents of S$8.55 psf/month in FY16 and FY17, Suntec City Office is expected to deliver positive rental reversions in the near term at possibly high single digit to low double digit levels if market rents remain strong.
• Suntec City Office saw new demand mainly from the TMT sector and expansion from co-working sector.
• We understand that WeWork has expanded in Suntec City Office, though still manageable at < 3% of Singapore office NLA.

Stable gearing and borrowing costs

• Aggregate leverage remained relatively stable at 38.2% vs 38.3% in 2Q19 and 38.6% in 4Q18.
• Suntec REIT’s all-in cost of debt fell marginally q-o-q to 3.01% from 3.06% in 2Q19.
• NAV per unit dipped to S$2.058 from $2.103 at end- 4Q18.

Key Updates

• Olderfleet, 477 Collins Street topped out of building structure on 31 July 2019, fit-out works are in progress, on track for scheduled completion in mid-2020.
• Pre-committed leases inched up to 87% (from 82.5% in 2Q19) with additional 5% with HOA.
• The acquisition of 21 Harris Street, Pyrmont, Sydney is pending completion, expected in 1Q20. Pre-committed occupancy at 65% to-date but has 3-year rent guarantee for remaining unrented spaces.

Maintain BUY; Target Price of S$2.15

• We maintain our BUY rating and Target Price of S$2.15 on Suntec REIT.
• See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports.
• Although lower capital distribution and DPU expectations may see some near-term overhang in share price performance, we believe that with more signs of improving underlying performance and sustainable growth trajectory, Suntec REIT will be able to deliver DPU growth in the future.

Source: DBS Research - 24 Oct 2019