Suntec REIT - CGS-CIMB Research 2021-01-26: Challenging Conditions

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Challenging Conditions

Suntec REIT’s FY20 DPU of 7.40 cents came in 1.2% above our FY20F projections.
Office segment to hold up well, retail and convention remain challenging.
We reiterate our ADD rating on Suntec REIT with a higher DDM-based target price of S$1.76.

Suntec REIT (SGX:T82U) reported a 12% y-o-y dip in 2H20 distribution income to S$116.4m (DPU: 4.109 cents) on the back of a 12% decline in gross revenue and an absence of capital top-up, partly offset by the release of retained income held back in 1H20 due to COVID-19 outbreak.
The weaker performance was due to lower contributions from the retail and convention segments, partly offset by higher office income and contributions from Australia properties acquired in 2019 and 2020.
Suntec REIT also took a 1.8% haircut to its portfolio value, lowering BV/unit to S$2.05.
Suntec REIT’s gearing stood at 44.3% at end-FY20.

Office segment saw a 17.7% y-o-y improvement in 2H20 NPI thanks to positive rental reversions, stronger Aussie dollar and new contributions from recently acquired/completed properties in Australia. Singapore office portfolio occupancy had a slight dip in occupancy to 96.7% at end-Dec 20.
Suntec REIT leased out 135k sq ft of office space in 4Q20 (FY20: 483.5k sq ft), of which 30% were new leases, largely coming from the technology, media and telecoms sectors. Suntec Office achieved a rental reversion of +3.7% in 4Q20 (FY20: +7.7%).
Suntec REIT has another 27.9% of office leases expiring in FY21F and management guided that it expects to continue to see positive reversions.
Occupancy for Australia office portfolio stood at 94% at end-Dec 20. While leasing demand remained subdued, Suntec REIT’s portfolio remains resilient and vacancies are protected by rental guarantees.

Retail segment NPI declined 51.1% to S$22.7m in 2H20 due mainly to lower revenue and provision for doubtful debt at Suntec Mall. There was also an S$2m loss from Suntec Convention. Committed occupancy at Suntec Mall was 90.1% at end-FY20.
In terms of operating metrics, 4Q20 shopper traffic/tenant sales had recovered close to 59%/88% y-o-y respectively. Rental reversion in 4Q20 was -10.8% (FY20: -1.3%). Suntec Mall has a remaining 20.2% of leases expiring in FY21F and we anticipate the negative rent reversion to persist even while occupancy is projected to trend higher by end FY21F.
In addition, short term rent restructure will be mitigated by higher turnover rent. Given the slower tourism recovery, Suntec REIT is undertaking a comprehensive business review to identify medium-and long-term opportunities to pivot Suntec Convention’s core business.

We tweak our Suntec REIT's FY21-22F DPU estimates to factor in lower retail reversion in FY21F before improving in FY22F. Accordingly, our DDM-based target price is revised marginally to S$1.76.
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 think the current Suntec REIT's share price has factored in much of the near-term earnings drag and retain our ADD rating.
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 2021-01-26

SGX Stock Analyst Report ADD MAINTAIN ADD 1.76 UP 1.730