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


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's 2H20 results highlights

  • 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.

Positive office rental reversion

  • 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 and convention remains challenging

  • 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.

Reiterate ADD

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | 2021-01-26
SGX Stock Analyst Report ADD MAINTAIN ADD 1.76 UP 1.730