Suntec REIT - CGS-CIMB Research 2020-04-23: Challenging Times

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Challenging Times

Suntec REIT's 1Q20 DPU of 1.76 Scts below expectations at 18.2% of our FY20F forecast.
Sluggish retail operations, mitigated by a more stable office portfolio.
Reiterate ADD with a lower Target Price of S$1.75.

In its 1Q20 business update, Suntec REIT (SGX:T82U) reported 1Q20 gross revenue of S$86.9m, -3.1% y-o-y, while distributable income fell 6.5% y-o-y to S$55.1m due to the absence of dividend income from Suntec Singapore, lower A&P income and weaker A$, partly offset by better office portfolio performance.
However, DPU slid a greater 27.7% y-o-y to 1.76 Scts in the absence of capital distributions, lower payout ratio of 90% and an enlarged units base.

Suntec REIT leased 133.9k sq ft of office space in 1Q20, of which 42% are new leases. Suntec Office achieved a rental reversion of 13.1% while committed occupancy slipped to 95.3%. Suntec REIT has another 8.6% of office leases to be renewed in FY20F. We expect the reversion gap to narrow in view of the dampened leasing demand.
Based on its assessment, Suntec REIT sees the possibility of rent deferment from about 7% of its Singapore office portfolio tenants by NLA.
Its Australia office portfolio was stable, with committed take-up at 97.7%. Suntec REIT estimates c.13% of its Australia office NLA could require partial rent rebate or deferment. That said, contributions from the completion of 477 Collins St and the recently-acquired Sydney office are likely to partly offset the drag.

Within its retail portfolio, Suntec REIT leased/renewed 84.4k sq ft of space in 1Q20, with Suntec Mall achieving a positive 16.1% reversion and committed occupancy of 98.3%. However, due to Covid-19, shopper footfall and tenant sales fell 22% and 20.2% y-o-y, respectively.
During this challenging period, Suntec REIT will be waiving rents for all retail tenants for Apr 2020 and passing through the property tax rebates, in addition to a one-month rental offset against security deposits. Suntec REIT sees the possibility of rent deferment and early termination of leases from c.14.7% of Suntec Mall’s tenants by NLA. It has a remaining 25.4% of retail space to be renewed in FY20F.

Suntec REIT’s aggregate leverage rose to 39.9% with the progressive payment for 477 Collins St and is expected rise further with the acquisition of an office asset in Sydney and completion of 477 Collins St by mid-2020.
With its gearing on the higher end of the SREITs’ gearing range, Suntec REIT is likely to consider a combination of debt/equity funding, asset divestment and any potential accretive acquisition to drive future income growth.

We cut our FY20-21F DPU estimates by 13.5-24.5% as we bake in the rent waivers, slightly lower portfolio occupancy and reduced capital distributions. As such, our DDM-based Target Price is lowered to S$1.75.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.
While we think Suntec REIT Share Price has factored in the downside risks to earnings and valuations are inexpensive, we see few catalysts for near-term share price outperformance.
Upside risk: faster-than-expected recovery from Covid-19 distruption.
Downside risk: slower-than-expected macro outlook.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-23

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