EUR 850.00 For Business Accounts Only

Morningstar | Suntec REIT’s 2Q18 In Line; Southgate Complex and Suntec Convention Drive Near-Term Growth. See Updated Analyst Note from 25 Jul 2018

Suntec Real Estate Investment Trust’s second-quarter 2018 results were largely in line with expectations. Net property income increased by 2.2% year over year to SGD 60.7 million on the back of a 3.7% year-over-year increase on revenue to SGD 90.5 million. Distribution per unit decreased by 0.8% year over year to SGD 0.02474. The higher revenue and net property income stemmed from improvements at 177 Pacific Highway and its retail and convention business at Suntec City, partly offset by the negative impact from Suntec City Office. The lower revenue and net property income at Suntec City Office was mainly due to transitory downtime from replacement leases and sinking fund contribution due to the asset-enhancement initiatives. Distribution from joint ventures and associates declined by 0.9% year over year, mainly owing to lower distribution from One Raffles Quay and MBFC Properties, which is partly mitigated by higher distributions from Southgate Complex, as the acquisition of an additional 25% stake in the property was completed on May 31. We retain our fair value estimate of SGD 1.75 per unit, along with our no-moat and stable moat trend ratings. We think the shares are overvalued at the current price, with future growth factored in. The growth is driven by the development of 9 Penang Road and Olderfleet, which are due to be completed in 2019-20.

Occupancy rates for its office and retail property portfolio were largely steady quarter over quarter at 99% and 98.2%, respectively. For its main office property, Suntec City Office, the retention rate remained high at 76% and management are seeing new demand mainly from the technology, media, and telecommunications, or TMT, sector. Management also secured leases at an average rent of SGD 9.15 per square foot per month. Although this rental rate is still below the average monthly rent of SGD 10.10 per square foot per month for grade A offices in Singapore, it is an improvement from the SGD 8.95 rental rate that was secured in first-quarter 2018. This supports our view that office rental rates have troughed in the first half of 2017 and are expected to recover in the next few years. We expect rental rates at Suntec City Offices to continue improving as they undergo an asset-enhancement initiative at its offices, which is expected to start in fourth-quarter 2018 and is expected to be completed by the end of 2021.

As for its main retail property, Suntec City Mall, footfall and tenant sales per square foot increased by 8.5% and 5% year-over-year, respectively. Tenant retention rate is lower quarter over quarter at 59% as management continues to adjust the tenant and trade mix. 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.

Near-term growth for the trust will be driven by (1) growth at its existing portfolio, especially from the convention business at Suntec City, as more events are being held here this year and the return of some biannual events; and (2) the acquisition of an additional 25% stake at Southgate Complex in Melbourne, Australia. Meanwhile, long-term growth will be driven by the development of 9 Penang Road and Olderfleet, which are due to be completed in 2019-20.