Suntec REIT - OCBC Investment 2020-07-23: Feeling The Pinch


Suntec REIT - Feeling The Pinch

  • Suntec REIT's 2Q20 DPU -35.1% y-o-y.
  • Further rental rebates to be provided to tenants.
  • Guiding for softer rental reversions.

Suntec REIT's 2Q20 results in-line with our expectations

  • Suntec REIT (SGX:T82U)’s 2Q20 results met our expectations. Gross revenue and NPI dipped 29.2% and 34.5% y-o-y to S$62.5m and S$36.9m due to rental assistance provided to retail tenants, provisions for rent assistance to eligible office tenants and losses at Suntec Singapore as a result of the postponement and cancellation of events due to the Covid-19 outbreak. This was partially offset by contributions from acquisitions in Australia.
  • Suntec REIT's 2Q20 DPU fell 35.1% y-o-y to 1.533 S cents as management retained 10% of its distributable income and there were also no capital distributions for the quarter (2Q19: S$6.5m or 0.236 S cents per unit).
  • For 1H20, Suntec REIT’s NPI slipped 20.6% to S$90.9m, while DPU of 3.293 S cents represented a decline of 31.3% and formed 47.7% of our FY20F forecast.

Expecting further rental assistance and negative rental reversions for Singapore retail

  • Operationally, committed occupancy for Suntec REIT’s Singapore office portfolio remained high at 98.6%, and positive rental reversions of 9.1% were achieved in 2Q20 at Suntec City Office (1H20: +11.4%). While management still guided for positive rental reversions in 2H20, it expects a moderation in magnitude.
  • For retail, footfall at Suntec City Mall slumped 83.4% y-o-y in 2Q20 due to the circuit breaker period. It has since moderated to -60% y-o-y in July. Rental reversions were -2.4% for the quarter (1H20: +8.4% due to strong 1Q) and management expects negative rental reversions of -10% to -20% in 2H20.
  • For 2020, Suntec REIT expects to provide 3-4 months of rental assistance from its own pocket for the majority of its tenants at Suntec City mall. Early termination of leases was 1% of NLA in 1H20 and expected to be 4% in 2H20. This will exert pressure on occupancy rates. Rent deferment was 5% of NLA in 1H20 and management expects to see another 5% in 2H20.
  • For office, Suntec REIT highlighted that ~50% of tenants at Suntec City Office are SMEs, of which 40% of these tenants are estimated to be able to qualify for rental assistance (i.e. ~20% of tenant base).
  • Suntec REIT’s Australia operations were largely stable, as majority of its tenants are large corporations and government tenants. There will also be incremental contributions from 21 Harris Street and 477 Collins Street ahead, while we note that the AUD has appreciated strongly against the SGD since mid-Mar this year.

Higher fair value of S$1.57

  • In terms of financial position, Suntec REIT’s aggregate leverage ratio increased 1.4 ppt q-o-q to 41.3%. Although it is trading at a cheap FY20F P/B ratio of 0.67x (1.7 standard deviation below 10-year average), this low P/B and relatively high gearing ratio would make it harder to make DPU accretive acquisitions, in our view.
  • But on a positive note, Suntec REIT’s all-in financing cost came down by 42 bps to 2.63% as compared to end-2019 levels.
  • We lower our FY20F DPU forecast slightly by 1.1% as we factor in weaker performance from Suntec REIT’s Convention business. However, our FY21F DPU projection is bumped up by 4.6% as we lower our financing cost assumption and also take into account Suntec REIT’s higher effective stake of 66.3% (previously 60.8%) in Suntec International Convention and Exhibition Centre. Consequently, our fair value estimate is raised from S$1.50 to S$1.57.
  • See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

OCBC Research Team OCBC Investment Research | 2020-07-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.57 UP 1.500