SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT 1Q21 - More Pluses Than Minuses
- Suntec REIT benefitted from the completion of 9 Penang Road in Singapore, 21 Harris Street in Sydney and 477 Collins Street in Melbourne, and increased contributions from ORQ and MBFC Towers 1 and 2.
- Domestically, we should see a recovery from Suntec City Mall with the return of the office crowd and new mini-anchors Don Don Donki, HipVan and SuperPark in 2H21.
- Suntec REIT provides an attractive 2022 distribution yield of 6.1% and trades at a 25% discount to NAV per unit. Maintain BUY. Target: S$1.72.
Suntec REIT's 1Q21 Results
- Suntec REIT (SGX:T82U) reported DPU of 2.045 cents (+16.2% y-o-y), which is in line with our expectations. Growth was mainly driven by its office portfolio.
NPI increased 10.2% y-o-y.
- Gross revenue grew marginally by 0.2% y-o-y, held back by Suntec Convention which saw its gross revenue drop 74% y-o-y or S$5.8m. However, losses from Suntec Convention were contained at S$2.5m due to restructuring (1Q20: S$1.7m). Suntec City Office benefitted from recovery of property tax.
- Suntec REIT also wrote back provisions for doubtful debts of S$0.7m for a tenant at Suntec City Mall.
Revenue from Suntec City Office increased 1% y-o-y.
- Occupancy at Suntec City Office was stable at 96%. Rental reversion was negative 0.9% in 1Q21. This is a timing issue as the signing of new leases under advance negotiation was delayed till 2Q21. Management maintained its guidance of positive rental reversion for Suntec City Office in 2021 due to low average expiring rent of S$8.73psf.
Revenue from Suntec City Mall declined 18% y-o-y.
- Occupancy improved by 1.4ppt q-o-q to 91.5%. Suntec City Mall suffered negative rental reversion of 26.2% in 1Q21 (-16% if we exclude leases for three new mini-anchors). The mall is expected to complete the restructuring of leases with lower base rent and higher proportion of gross turnover (GTO) rent by 2Q21. The new lease structure exacerbates the negative rental reversion, which is calculated using the lower base rents. Management expects negative rental reversion to moderate to 15-20% for 2021.
Boost from the completion of 9 Penang Road, 21 Harris Street and 477 Collins Street.
- 9 Penang Road in Singapore made maiden income contribution of S$1.8m in 1Q21. 21 Harris Street in Sydney (contribution with effect from 6 Apr 20) and 477 Collins Street in rne (contribution with effect from 1 Aug 20) contributed NPI of S$2.9m and S$5.8m respectively.
- Contribution from MBFC Towers 1 and 2 increased 7% y-o-y due to higher rents. One Raffles Quay (ORQ) benefitted from one-off income from the re-instatement of leases at ORQ (net positive impact of S$2.5m). Contributions from its Australian properties were enhanced by appreciation of the Australian dollar.
Benefitting from lower financing cost.
- Suntec REIT’s all-in financing cost has improved 0.13ppt q-o-q to 2.40%. Aggregate leverage remains elevated at 44.4%. Management will explore opportunities for divestment so as to deleverage its balance sheet.
STOCK IMPACT
Positive reversion for Suntec City Office.
- The proportion of workforce working from office is estimated at 30% at Suntec City Office and 45% at ORQ and MBFC Towers 1 and 2. With effect from 5 Apr 21, safe management measures have been eased to allow up to 75% of employees to work from their offices. Leasing demand is gaining momentum from technology, media and telecommunications (TMT) and pharmaceutical companies.
- Occupancies at Suntec City Office, MBFC and ORQ are expected to moderate slightly to 95%. Revenue from Singapore office should remain stable due to past 11 consecutive quarters of positive rental reversion.
More mini-anchors at Suntec City Mall.
- Suntec REIT has secured three mini-anchors – Don Don Donki (discount chain store), HipVan (home furnishing) and SuperPark (indoor activity park) – which will commence operations throughout 2021. More employees returning to work at Suntec City Office will translate to higher shopper traffic and tenant sales. Management expects shopper traffic to recover to 80% of pre-COVID-19 levels and occupancy should hit 95% by end-21.
- Suntec REIT expects GTO rent to support the recovery in tenant sales back to pre- COVID-19 levels in 2022.
Resiliency from Australia due to long leases and rent guarantees.
- 40-50% of the workforce has returned to work at the offices in Sydney and Melbourne. Rents could come under pressure due to high nation-wide CBD vacancy rate of 13.3% and new supply coming on-stream. Suntec REIT has minimal lease expiry in 2021. Existing rent guarantees for the vacant spaces at 55 Currie Street (till Dec 21), 21 Harris Street (till Apr 23) and 477 Collins Street (till Jul 25) provide resiliency.
Upside from capital distribution.
- Management will consider capital distribution for divestment of 9 Penang Road in 2H21.
EARNINGS REVISION/ RISK
- We maintain our existing DPU forecasts for Suntec REIT.
VALUATION/ RECOMMENDATION
- Maintain BUY on Suntec REIT. Our target price of S$1.72 is based on DDM (cost of equity: 6.5%, terminal growth: 1.2%).
- Suntec REIT's share price trades at an attractive discount of 25% to NAV per unit.
- See
SHARE PRICE CATALYST
- Continued positive rent reversion at Suntec City Office.
- Employees returning to work at Suntec City Office and resumption of events at Suntec Convention to trigger recovery in shopper traffic and tenant sales at Suntec City Mall.
- Full-year contributions from 9 Penang Road in Singapore and 477 Collins Street and 21 et in Australia in 2021.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-04-27
SGX Stock
Analyst Report
1.720
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