Suntec REIT - OCBC Investment 2020-04-23: Retail & Convention Business Under Pressure


Suntec REIT - Retail & Convention Business Under Pressure

  • Suntec REIT's 1Q20 DPU -27.7% y-o-y.
  • Rental reversions ahead likely to come in negative for retail.
  • Capital distributions may provide some buffer in future quarters.

Suntec REIT's 1Q20 results a big miss

  • Suntec REIT (SGX:T82U)’s 1Q20 results fell short of our expectations, as DPU dipped 27.7% y-o-y to 1.76 S cents. This formed 17.9% of our FY20 forecast. See Suntec REIT Announcements. The sharp decline was driven by
    1. a drop in distributable income from operations,
    2. retention of 10% of distribution (S$5.5m),
    3. absence of capital distributions (1Q19: S$6.5m) and
    4. larger unit base.
  • The retention of income was to conserve cash in anticipation of a muted 2Q20, due to the ‘circuit breaker’ period and rental concessions given to tenants.

Weakness expected at Retail and Convention business; office to be more resilient

  • One of the main drags on Suntec REIT’s performance was its Convention business, which saw a NPI of -S$1.7m due to a 47.2% y-o-y fall in the number of events. This weakness is expected to continue as the more profitable international and large scale events may not come back this year.
  • Although Suntec City Mall achieved robust positive rental reversions of 16.1% in 1Q20, management now expects rental reversions to be negative at -5% to -10% for the rest of FY20 given the COVID-19 impact. Suntec REIT also guided that it expects rent deferment and early termination of leases to constitute approximately 6% and 8.7% of Suntec City Mall’s total NLA, respectively.
  • The office segment was a brighter spot, as rental reversion came in at +13.1% in 1Q20, and likely to stay in the positive territory given where expiry rents are. Management expects rent deferment from ~7% of its Singapore office portfolio NLA.

Australia portfolio expected to remain resilient, but negative impact from AUD weakness

  • In Australia, Suntec REIT’s office portfolio is expected to be resilient, underpinned by firm occupancy and long WALE of 4.9 years (as at 31 Mar 2020), with only 1.8% of its Australian leases expiring in 2020. That said, the depreciation of the AUD against SGD since the start of the year could have some negative impact on Suntec REIT’s distributable income, in our view, as Suntec REIT has only hedged ~20% of its AUD income for 2020.
  • We factor in weaker AUD assumptions in our model, incorporate the rental concessions offered to tenants and also assume softer occupancy and rental rates.
  • Although we believe some capital distributions may be deployed to provide some buffer in subsequent quarters, we still see the need to reduce our FY20F and FY21F DPU forecasts by 29.7% and 21.6%, respectively. Our fair value estimate dips from S$2.05 to S$1.50.
  • Notwithstanding our fair value cut, we see value at current prices, with Suntec REIT trading at FY20F P/B ratio of 0.61x, as at 22-Apr close.
  • See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Andy Wong CFA OCBC Investment Research | 2020-04-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 DOWN 2.050