Suntec REIT - Maybank Kim Eng 2020-12-15: Challenging Headwinds, Further Deterioration Ahead; Initiate At SELL

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Challenging Headwinds, Further Deterioration Ahead; Initiate At SELL

Suntec REIT (SGX:T82U)’s slow retail recovery and rising office vacancy due to increasing work-from-home (WFH) trends suggest weak fundamentals in our view.
Suntec REIT's inorganic initiative is a silver lining, as contributions rise in 2021 from 21 Harris and 477 Collins in Australia, together the recently-acquired Nova properties in the UK. These are likely insufficient to fully offset downward pressure in its existing operation, but could help it wean off capital distributions, which have been supplementing dividends.
We see an overhang from a potential dilutive equity raise as Suntec REIT continues to pursue acquisition opportunities, given high c.43% gearing, and valuations at 0.7x P/B.

We initiate coverage on Suntec REIT at SELL with a DDM-based target price of S$1.20 (COE: 8.2%, LTG: 1.0%).

Retail recovery at Suntec City mall has been sluggish, with 9M20 footfall at -53% y-o-y, flat from 1H20, and 9M20 tenant sales at -33% y-o-y, behind CapitaLand Mall Trust (now CapitaLand Integrated Commercial Trust (SGX:C38U))’s downtown malls sales at -26% y-o-y. 3Q20 retail rent reversion fell to -9.4% (from -2.4% in 2Q20).
Suntec REIT’s plans to rebalance and strengthen its retail tenants’ profile could pressure occupancy to c.90% (from 93.3% in 3Q20), as the convention operations remain loss-making due to a lack of large-scale events in 2021.
Suntec REIT's SG office occupancy remains high at 98.1%, but rent reversion moderated to +4.6% (from +9.1%), and management expects downsizing trends averaging 10-15% across leases expiring in FY21-23E.

Suntec REIT has geared up to acquire a 50% stake in Nova properties, to mark a UK entry. The deal’s key merits are:
1. its full occupancy and 11.1-year WALE versus Suntec REIT’s office WALE of 4 years;
2. its strategic location in London’s prime West End business district opposite Victoria station; and
3. 4.6% NPI yield valuation (with a two-year income guarantee capped at GBP5.0m on the retail component), above recently-transacted yields of 4.0-4.2% for West End offices.
Post-deal, the UK would contribute 7% and 11% to Suntec REIT's AUM and income, behind Australia at 16% and 21% respectively.

Suntec REIT raised S$200m in perpetual securities at 3.8% to partly fund the Nova acquisition, which lowered pro-forma DPU accretion to 3.4% (from +4.9%). Post-deal, gearing rises to c.43%, which is the highest among peers.
Suntec REIT is keen on asset recycling to further lower gearing, but we see a neutral distribution (DPU) impact given weak pricing power in this cycle. We see an overhang from a potential dilutive equity raising as Suntec REIT continues to pursue acquisition opportunities.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-12-15

SGX Stock Analyst Report SELL INITIATE SELL 1.20 SAME 1.20