Suntec REIT 3Q20 - UOB Kay Hian 2020-10-23: Overhang From Equity Fundraising Removed


Suntec REIT 3Q20 - Overhang From Equity Fundraising Removed

  • Suntec REIT benefitted from a sequential rebound at Suntec City Office and Suntec City Mall, organic growth at ORQ and maiden contribution from the newly-completed 477 Collins Street in Melbourne, Australia.
  • Management intends to finance the acquisition of Nova Properties through perpetual securities (S$200m) and bank loans (£200m loans denominated in GBP and S$217.9m loans denominated in S$). The overhang from equity fundraising has been removed.

Suntec REIT's 3Q20 Results

Suntec City Office: More resilient than anticipated.

  • Revenue and net property income (NPI) from Suntec City Office increased 8% and 15% q-o-q respectively to S$33.8m and S$24.4m in 3Q20. New and renewed leases with NLA of 135,100sf were signed with a retention ratio at 75%.
  • Positive rental reversion moderated from 9.1% in 2Q20 to 4.6% in 3Q20. Nevertheless, this is the 10th consecutive quarter of positive rent reversions. New demand came from technology, media & telecommunications (58%) and banking, insurance & financial services (18%). Occupancy at Suntec City Office was stable at 97.0%.
  • 477 Collins Street located in Melbourne, Australia made maiden contribution of S$3.7m and S$3.0m respectively to gross revenue and NPI since 1 Aug 20.

Suntec City Mall: Benefitting from return of office workers.

  • Revenue and NPI from Suntec City Mall rebounded 42% and 78% q-o-q respectively to S$21m and S$9.1m from a low base in 2Q20. Rental reversion remains negative at 9.4% in 3Q20 (2Q20: -2.4%). Retention ratio was at 65% in 9M20. Tenant sales dropped 20.6% y-o-y, although shopper traffic fell by a steeper 53.3% y-o-y in 3Q20.
  • Occupancy dipped 3ppt q-o-q to 93.3%. Management expects occupancy to trend lower towards nationwide average of 88%.

Contributions from JVs affected by MBFC and Southgate Complex.

  • Occupancies at Marina Bay Financial Centre Towers 1 and 2 (MBFC) and One Raffles Quay (ORQ) were stable at 100% and 98.4% respectively. Income contribution from ORQ increased 13% y-o-y due to positive rental reversion. Income contribution from MBFC dropped 18% y-o-y due to absence of one-off compensation received in 3Q19. Income contribution from Southgate Complex dropped 41% y-o-y due to rental waiver for retail tenants.

Geographical diversification to the UK.

  • Suntec REIT has entered into a sale and purchase agreement to acquire a 50% interest in two Grade-A office buildings under Nova Properties for an agreed value of £430.6m (S$766.5m). It has total NLA of 559,000sf and a long leasehold tenure of 1,042 years. Nova Properties are located at the West End of London. The buildings are located opposite the Victoria Station, an important interchange for the London Underground network and the second busiest railway station in the UK. Nova Properties provides an NPI yield of 4.6%.

Overhang from equity fundraising removed.

  • Management is looking to finance the acquisition of Nova Properties through a combination of perpetual securities and bank loans:
    • Suntec REIT has issued S$200m of fixed-rate subordinated perpetual securities with interest rate at 3.8%. Management estimates the acquisition is accretive to 1H20 DPU by 3.4% with funding from perpetual securities (S$200m) and bank loans (£200m loan denominated in GBP and S$217.9m loan denominated in Singapore dollars). Aggregate leverage is elevated at 41.5% as of Sep 20. We foresee aggregate maintained near current levels post-acquisition of Nova Properties as cash holding was high at S$355m as of Jun 20.
    • Management will explore opportunities to divest properties to deleverage.
  • Management expects the acquisition to be completed by Dec 20.

Outlook is positive for offices.

  • Management is optimistic of demand for office space arising from Chinese technology giants setting up their regional headquarters in Singapore. ByteDance has taken up office space at ORQ and is looking to further expand.
  • Management is optimistic of maintaining positive rental reversion as average expiring rent is lower at S$8.78psf pm in 2021.

Suntec REIT - Earnings Revision & Recommendation

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-23
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