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Morningstar | Suntec REIT’s 3Q Affected by Higher Cost; Suntec Retail and Southgate Complex Drive Near-Term Growth

Suntec Real Estate Investment Trust’s, or Suntec REIT’s, third-quarter 2018 results were largely in line with our expectations. Net property income decreased by 11.4% year over year to SGD 60.7 million on the back of a 2.5% year-over-year drop on revenue to SGD 88.8 million. Distribution per unit increased by 0.3% year over year to SGD 0.02491, while net asset value per unit declined to SGD 2.08 from SGD 2.12. The fall in revenue was mainly due to lower revenue from 177 Pacific Highway (as a result of the weakened Australian dollar) and Suntec City Office (due to transitory downtime from replacement leases, which will commence operations by year-end 2018). This was partly offset by higher revenue at Suntec City Mall. Meanwhile, the lower net property income was largely attributable to sinking fund contribution due to the asset-enhancement initiatives at Suntec City Office, reduced contribution from 177 Pacific Highway, and higher cost. Excluding the sinking fund contribution, net property income still decreased by 3.9% year over year. On the other hand, distribution from joint ventures and associates declined by 2.3% year over year as a result of lower distribution from One Raffles Quay and MBFC Properties, which is partly mitigated by higher distribution from Southgate Complex, as the acquisition of an additional 25% stake in the property was completed on May 31, 2018. After factoring in the third-quarter results and our latest foreign exchange rate assumptions, we made minor adjustments to our model and lowered our fair value estimate to SGD 1.72 per unit (from SGD 1.75 per unit). Our no-moat and stable moat trend ratings are unchanged. We think the shares are slightly overvalued at the current price, with future growth (driven by the development of 9 Penang Road and Olderfleet, which are due to be completed in 2019-20) priced in.

Occupancy rates for its office and retail property portfolio were largely steady quarter over quarter at 98.9% and 98.1%, respectively. For its main office property, Suntec City Office, retention rate remained high at 68% and management is seeing new demand, mainly from the technology, media, and telecommunications, or TMT, as well as the energy and natural resources sectors. We still expect rental rates at Suntec City Office to improve, as it will undergo an asset-enhancement initiative starting in fourth-quarter 2018 and expected to be completed by the end of 2021.

As for its main retail property, Suntec City Mall, year-to-date footfall increased by 5.5% year over year. Tenant retention rate is lower quarter over quarter at 53% as management continues to adjust the tenant and trade mix. We expect future growth to be driven by management’s initiatives, which includes 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. The new tenants that it has recently secured include SuperPark (an indoor activity park from Finland), Foot Locker (a leading sportswear and footwear retailer), and State Swim (a new-to-market swim school operator from Australia).

We expect near-term growth for the trust will be driven 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. 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.