Suntec REIT - DBS Research 2020-06-08: Looking Ahead To Recovery

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SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Looking Ahead To Recovery 

• The return of workers to workplaces bodes well for Suntec City Mall and its office portfolio.
• Risks of higher rental rebates to be partially mitigated by income from completing office buildings in 2H20.
• Suntec REIT currently trading at close to -1SD and poised to ride on recovery.
• Maintain BUY; lower Target Price to S$1.81.

Suntec REIT 1Q20 Operational updates:

• Suntec REIT (SGX:T82U)'s 1Q20 DPU fell 28% y-o-y to 1.76 Scts due to lower contributions from operations which were impacted by COVID-19 and Circuit Breaker; Suntec retained 10% of distribution income and held back its capital distribution.
• 1Q20 revenue and NPI fell 3% y-o-y and 7% y-o-y to S$87m and S$54m respectively largely due to decline in performance from Suntec City Mall (NPI -10% y-o-y) and Suntec Convention Centre (NPI -S$1.7m in 1Q20) which were impacted by the COVID-19 outbreak and the implementation of the Circuit Breaker and weaker AUD, partially offset by contributions from 55 Currie St.
• While rental reversions remained healthy at +13% and +16% for Suntec City Office and Suntec City Mall respectively, occupancies have fallen marginally by 1.3ppts q-o-q.
• Suntec City Office has renewed/completed 52% of leases expiring in FY20, thus bringing down the leases expiring this year from 20% to 8.6%. Also, 5.5% of leases expiring in FY21 have been renewed early.
• Suntec City Mall has renewed/completed c.one-third of leases expiring in FY20, bringing down the lease expiries from 41% to 25.4%.
• Suntec REIT's gearing increased to 39.9% vs 37.7% in 4Q19 mainly due to drawdown of loans for the acquisition of 21 Harris St and 477 Collins St which is under development, and weaker AUD. Management expects gearing to increase to 41.5% by end-1H20 post the completion of acquisition of 21 Harris St on 6 Apr 2020 and 477 Collins St.

Suntec REIT - Impact from COVID-19:

• Singapore office
  • Property tax rebates will be passed on to office tenants.
  • Estimates 7% of the portfolio’s NLA to request for rent deferment and less than 1% of the office tenants by NLA are in vulnerable sectors that could terminate their leases early.
• Suntec City Mall
  • Rental and property tax rebates are granted to tenants between Mar and May 2020. April and May rents will be waived.
  • Option to draw down one month of cash Security Deposits (Jun 2020).
  • Estimates tenants accounting for c.6% and c.8.7% of NLA to request for rent deferment or early termination respectively.
• Suntec Convention
  • Controlling costs by closing various sections, and suspending maintenance and service contracts.
  • May consider to extend temporary closure if mandated measures are prolonged.
• Australia Portfolio
  • Mandated by law for landlords to grant rent reliefs to SME tenants whose revenues are negatively impacted.
  • 87% of Australia portfolio comprises leases to large corporations, government tenants and businesses that are not expected to be impacted by the relief measure.
  • Estimates c.7% of the office tenants which might be impacted and granted partial rent rebate and deferment.
  • Estimates rental rebate to be granted to c.6% of eligible retail SME Tenants.
• In summary, based on the above expectations, our ballpark estimates are that c.15% of Suntec REIT’s NPI and JV contribution could be impacted either with rent deferment of six months, rent rebates of up to three months and early termination.

Suntec REIT - Outlook

• Suntec REIT's Singapore office portfolio has remained resilient during this period. While management expects some weakness from the current 98.8% occupancy level, portfolio occupancy is expected to remain healthy at c.95%.
• Singapore office rental reversions are expected to remain positive given the good buffer from low expiring rents (Suntec City Office’s expiring rents in FY20 and FY21 are S$9.1 psf and S$8.7 psf respectively), and limited office supply.
• Suntec City mall may see negative rent reversions in the remaining quarters and occupancy may trend closer to 90% vs 98.3% currently.
• Suntec Convention - Expect international and large-scale events to remain weak in FY20 while smaller local events/meetings may recover in 2H20 post the end of Circuit Breaker.
• Australia Portfolio – weaker economic activity may put pressure on occupancy and rents but Suntec REIT is supported by the expected completion of 477 Collins Street by mid-2020 and the newly acquired 21 Harris St.
• Management expects to maintain Suntec REIT's gearing levels at 40-42% with acquisitions and may explore potential divestments.

Maintain BUY; lower Target Price to S$1.81.

• We maintain our BUY call on Suntec REIT but lower our Target Price to S$1.81 from S$2.15. With the end of the Circuit Breaker and potentially earlier start of phase 2 reopening, we believe the return of office workers will bode well for Suntec City Mall and its office buildings as the economy gradually recovers.
• See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.
• We believe current valuation at 0.7x P/NAV, close to -1SD, has limited downside risks and is poised to ride on recovery.

See also S-REIT sector report: Singapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-08

SGX Stock Analyst Report BUY MAINTAIN BUY 1.81 DOWN 2.150