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Morningstar | Suntec REIT’s Fiscal-Year 2018 in Line; 9 Penang Road and Olderfleet Drive Future Growth; FVE Raised

Suntec Real Estate Investment Trust’s full-year 2018 results were in line with our expectations. After rolling forward our forecast and factoring in our latest foreign exchange rate assumptions, we made minor adjustments to our model and raised our fair value estimate to SGD 1.76 per unit from SGD 1.72. 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, which are due to be completed in 2019-20. 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 has also stated that it is looking for acquisition opportunities mainly in the Australian office market.

Net property income decreased by 1.4% year over year to SGD 241 million on the back of a 2.6% year-over-year increase on revenue to SGD 363.5 million. Distribution per unit decreased by 0.2% year over year to SGD 0.9988 while net asset value per unit declined to SGD 2.10 from SGD 2.12. The higher revenue was mainly due to higher revenue contribution from: (1) Suntec Singapore (its convention business) due to an increase in events that are being held once every two years and it also hosted the ASEAN Summit meetings where Singapore was the host country; and (2) Suntec City Mall as management was actively adjusting the trade and tenant mix as well as reconfigured the floor space to increase net lettable area. This was partly offset by lower revenue at Suntec City office due to transitory downtime from replacement leases. The lower net property income was mainly due to sinking fund contribution of SGD 11.2 million due to the asset enhancement initiatives at Suntec City Office. If this is being excluded, net property income would have increased by 3.1% year over year. Dividend distribution from joint ventures and associates declined by 3.1% 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 rates for its office property portfolio was largely steady quarter over quarter at 98.7% while occupancy rates for its retail property portfolio increased quarter over quarter to 99.1% from 98.1%. For its main office property, Suntec City Office, retention rate remained high at 65%. For fourth quarter 2018, management saw new demand mainly from the banking, insurance, financial services, technology, media, and telecommunications sectors. We expect rental rates at Suntec City Offices to continue to improve going forward, supported by a recovery in the office rental rates and the ongoing asset enhancement initiative that 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 feet increased by 4.8% and 5.2% year over year, respectively in 2018. Tenant retention rate was at 55% as management focused on adjusting the tenant and trade mix. We expect future growth to be driven by management’s initiatives, including 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.