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


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.

1Q20 business highlights

  • 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.

Office portfolio continues to shine

  • 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.

Challenging times for retail

  • 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.

Gearing inched up q-o-q

  • 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.

Retain ADD rating

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-23
SGX Stock Analyst Report ADD MAINTAIN ADD 1.75 DOWN 2.150