Suntec REIT - UOB Kay Hian 2021-01-27: 2H20 The Sunshine After The Rain


Suntec REIT - 2H20 The Sunshine After The Rain

  • Suntec REIT’s 2H20 results were affected by rental assistance for Suntec City Mall and losses from Suntec Convention. Growth in 2021 will be driven by positive rental reversion for Suntec City Office, absence of rent assistance totalling S$22m in FY20 for Suntec City Mall and full-year contributions from 477 Collins Street in Melbourne.
  • Suntec REIT provides attractive 2021 distribution yield of 5.9% and trades at a significant 25% discount to NAV/share of S$2.055.
  • Maintain BUY. Target: S$1.72.

Suntec REIT's 2H20 Results

  • Suntec REIT (SGX:T82U) announced 2H20 DPU of 4.109 cents, down 12.8% y-o-y. Results were affected by rental waivers granted to retail tenants at Suntec City Mall and Southgate Complex, and an absence of contribution from Suntec Convention & Exhibition Centre.
  • Suntec REIT has fully released S$10.3m of distributable income previously retained in 1H20 during 2H20.

Suntec City Office: Provides ballast of resiliency.

  • Revenue and NPI from Suntec City Office increased 1.2% and 2.4% y-o-y respectively in 2H20. New and renewed leases with NLA of 135,000sf were signed with retention ratio at 70% in 4Q20. Positive rental reversion moderated from 4.6% in 3Q20 to 3.7% in 4Q20. Nevertheless, this is the 11th consecutive quarter of positive rent reversions.
  • Average passing rent for Suntec City Office increased 0.7% q-o-q to S$8.84psf pm. New demand came from Technology, Media & Telecommunications (TMT) (48%) and Banking, Insurance & Financial Services (23%) in FY20. Occupancy at Suntec City Office eased 1.4ppt q-o-q to 95.6%.
  • 477 Collins Street located in Melbourne, Australia, made contribution of S$6.2m and S$5m respectively to gross revenue and NPI in 4Q20. Gross revenue and NPI from 177 Pacific Highway increased 7% and 8% y-o-y respectively due to strengthening of the Australian dollar.

Suntec City Mall: Benefitting from return of office workers.

  • Revenue and NPI from Suntec City Mall declined 28% and 46% q-o-q respectively. Rental reversion remains negative at 10.8% in 4Q20 (3Q20: -9.4%). Retention ratio was 75% in FY20. Tenant sales recovered to 88% of pre-COVID-19 levels in 4Q20. Occupancy dipped 3.2ppt q-o-q to 90.1%.

Contributions from JVs affected by MBFC.

  • Occupancies at Marina Bay Financial Centre (MBFC) Towers 1 and 2 and One Raffles Quay (ORQ) eased by 1.8ppt and 1.1ppt respectively to 98.2% and 97.3%.
  • Income contribution from MBFC dropped 6% y-o-y due to an absence of one-off compensation received in 3Q19. Income contribution from ORQ increased 33% y-o-y due to positive rental reversion.

Outlook is positive for offices.

  • Management expects the return of workforce to increase from the current 20% to 25-35% in 1H21 and 50-70% in 2H21. TMT and pharmaceutical companies are key demand drivers. Management is optimistic about demand for office space arising from China technology giants setting up their regional headquarters in Singapore.
  • ByteDance/TikTok has taken up 80,000sf of office space at ORQ and is looking to further expand. Occupancies at Suntec City Office, MBFC and ORQ are expected to maintain at mid 90%. Management expects to maintain positive rental reversion as average expiring rent is low at S$8.79psf pm in 2021.

Suntec City Mall benefits from healthy domestic consumption in Singapore.

  • Shopper traffic is expected to recover to 80% of pre-COVID-19 levels from the current 59% due to the return of the office crowd. New tenant SuperPark Singapore, a family-oriented recreation complex with tube slides, pedal cars and obstacle courses, will improve occupancy by a significant 3ppt.
  • Management expects occupancy to recover to above 9 by end-21. However, rental reversion is expected to be negative 8-12% in 2021.

Full-year contribution from 477 Collins Street in Melbourne in 2021.

  • Suntec REIT obtained practical completion for 477 Collins Street in Jul 20, and income contribution from the building commenced in 1 Aug 20. Suntec REIT has a 50% stake in the 39-storey office building located within the Melbourne CBD free tram zone with four tram lines serving Collins Street. The building is 97% pre-committed with a long weighted average lease to expiry (WALE) of 11 years. Its key tenants include Deloitte, Lander & Rogers, Norton Rose Fulbright and Urbis.

Geographical diversification to the UK.

  • Suntec REIT has completed the acquisition of a 50% interest in two Grade-A office buildings under Nova Properties for an agreed value of £430.6m (S$766.5m) on 18 Dec 20. 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%.

Asset enhancements.

  • Suntec REIT has submitted development application to redevelop the retail podium and construction of a new office tower at Southgate Complex in Melbourne, which is currently being reviewed by the relevant authorities. It is also conducting a review of Suntec Convention & Exhibition Centre and could deploy a portion of the convention space for new concepts, such as e-sports.

Suntec REIT - Valuation & Recomendatoin

Jonathan KOH CFA UOB Kay Hian Research | 2021-01-27
SGX Stock Analyst Report BUY MAINTAIN BUY 1.72 DOWN 1.750