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Morningstar | Suntec REIT’s 1Q 2019 Largely in Line; 9 Penang Road Pre-Leased; Olderfleet Drives Future Growth. See Updated Analyst Note from 24 Apr 2019

Suntec Real Estate Investment Trust’s, or Suntec REIT’s, first-quarter 2019 results were largely in line with our expectations. After factoring in slightly lower contribution from its Australian properties due to the weakening of the Australian dollar and the relocation of UBS from One Raffles Quay and Suntec City Offices to 9 Penang Road in 2020, we lowered our fair value estimate marginally to SGD 1.74 per unit from SGD 1.76. The trust has secured UBS as its anchor tenant for 9 Penang Road, which will be completed in fourth-quarter 2019. UBS will occupy all of the office space at 9 Penang Road, and rental contribution is expected to start in second-half 2020 after the fit-out period. Pre-leasing of the retail space is currently ongoing, which we assume will also contribute positively from second-half 2020. Our no-moat and stable moat trend ratings remain unchanged. We think the shares are slightly overvalued at the current price, with future growth factored in, driven by the development of 9 Penang Road and Olderfleet (to be completed in 2020). Meanwhile, near-term growth for the trust will be supported by: (1) growth at Suntec City Mall as it continues to improve the tenant and trade mix and bring in new-to-market concepts; and (2) the acquisition of an additional 25% stake at Southgate Complex in Melbourne, Australia, which was completed on May 31, 2018. The trust is also on the lookout for acquisition opportunities to ensure long-term growth for its unitholders.

Net property income decreased by 7.6% year over year to SGD 58.2 million on the back of a 1.1% year-over-year decrease on revenue to SGD 89.7 million. Distribution per unit was largely flat year over year at SGD 0.2434. The fall in revenue was mainly due to lower contribution from: (1) Suntec Singapore (its convention business) due to the lack of activities as some events are being held once every two years; and (2) 177 Pacific Highway due to the weakening Australian dollar. This was partly mitigated by higher revenue from Suntec City Mall as management was adjusting the trade and tenant mix as well as reconfigured the floor space to increase net lettable area. Suntec City Office is also impacted by sinking fund contribution due to the asset enhancement initiatives that is expected to be completed by end of 2021. Dividend income from joint ventures and associates declined by 0.6% year over year mainly due to lower distribution from One Raffles Quay and MBFC Properties, which is partly mitigated by higher distributions from Southgate Complex.

Occupancy rate for its office property portfolio improved slightly quarter over quarter to 98.9% from 98.7%, while occupancy rate for its retail property portfolio decreased quarter over quarter to 97.4% from 99.1% due to ongoing asset enhancement initiatives at its main retail property, Suntec City Mall. For its office portfolio, retention rate remained high at 80%. For first-quarter 2019, management are seeing new demand mainly from the shipping and freight forwarding, trading and investments as well as the technology, media, and telecommunications sectors for its main office property, Suntec City Offices. We expect rental rates at Suntec City Offices to continue to improve going forward, supported by a recovery in the office rental market and the ongoing asset enhancement initiative.

As for Suntec City Mall, footfall and tenant sales per square feet increased by 3.3% and 1.3% year over year, respectively in first quarter 2019. Tenant retention rate was at 39% as management continues to focus on adjusting the tenant and trade mix. Currently, the trust is undergoing an asset enhancement initiative at the basement level of Suntec City Mall that will be completed by July 2019. We expect future growth to be driven by management’s initiatives, which include moving tenants around to better utilize floor space, improving tenant and trade mix, bringing in new-to-market concepts, increasing net leasable area through reconfiguration of floor space, increasing marketing efforts and publicity to encourage consumers to shop at the mall, and utilizing its big atrium space for different events.