Suntec REIT - CGS-CIMB Research 2020-10-22: Supported By Higher Office Contributions

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Supported By Higher Office Contributions

Suntec REIT's 3Q/9M20 DPU of 1.848/5.173 Scts is in-line with our FY20F estimates.
Higher office income partly offsets drag from retail and convention segments.
Reiterate ADD rating with an unchanged DDM-based Target Price of S$1.73.

Suntec REIT (SGX:T82U) reported a 3Q20 gross revenue of S$79.6m (-13.4% y-o-y) while distribution income from operations fell 12.6% y-o-y to S$52.2m. The weaker performance was due to lower contributions from the retail and convention segments, partly offset by higher office income.
Suntec REIT's 3Q/9M20 DPU from operations of 1.848/5.173 Scts was in line with our expectations, at 27.6%/77.2% of our FY20F forecast.

The office segment, including JV contributions, recorded an 11.3% y-o-y improvement in NPI thanks to positive rental reversions, stronger A$ and new contributions from recently acquired/completed properties in Australia. Singapore office portfolio continued to be well occupied at 98.1% at end-3Q20. Suntec REIT leased out 135.1k sq ft of office space in 3Q20, of which 25% were new leases.
Suntec Office achieved a rental reversion of +4.6% in 3Q (9M: +9%). Suntec REIT has another 5.1% of office leases expiring in 4QFY20F and management guided that it expects to continue to see positive reversions. Suntec REIT estimates the possibility of early termination and rent deferment at 0.9% and 3% of NLA, respectively, for its Singapore office portfolio as of end-3Q20.
Occupancy for Australia office portfolio stood at 94% at end-3Q. Apart from income contribution from 477 Collins from Aug 2020, Suntec REIT also recently announced the proposed acquisition of 50% of Nova Properties in UK for a total cost of £439.4m. Income from these properties should also continue to bolster office portfolio income. The purchase will likely be funded by debt and proceeds from S$200m perpetual securities.
Suntec REIT’s aggregate leverage stood at 41.5% at end-3Q20.

3Q20 retail NPI fell 63.8% y-o-y to S$8.4m due mainly to lower revenue and provision for doubtful debt at Suntec Mall. There was also a S$3.3m loss from Suntec Convention. Committed occupancy at Suntec Mall was 93.3% at end-3Q and management expects overall mall occupancy to trend closer to the nationwide average of 88% for the remainder of the year.
In terms of operating metrics, 3Q shopper traffic/tenant sales were encouraging and had recovered close to 50%/80% of pre-COVID-19 levels respectively. Rental reversion for the quarter averaged -9.4% (9M: +2.7%).
Suntec Mall has a remaining 11.8% of leases expiring in 4Q and we anticipate the negative rent reversion to persist. Suntec REIT is also undertaking a comprehensive business review to identify medium-and long-term opportunities to pivot Suntec Convention’s core business.

We leave our Suntec REIT's FY20-22F DPU estimates unchanged and retain our DDM-based Target Price of S$1.73. We think the current Suntec REIT share price has factored in much of the near-term earnings drag and maintain our ADD call.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.
Re-rating catalyst: faster-than-expected recovery of its retail and convention business from COVID-19 disruption.
Downside risk: higher than estimated rental waivers to tenants.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-22

SGX Stock Analyst Report ADD MAINTAIN ADD 1.730 SAME 1.730