SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT - 1h21 Growth From Newly-completed & Newly-acquired Buildings
- Suntec REIT benefitted from the newly-completed 21 Harris Street in Sydney and 477 Collins Street in Melbourne and newly-acquired Nova properties in London in 1H21. The acquisition of The Minster Building in London is funded by a combination of divestments proceeds, GBP loan and perpetual securities and is accretive to DPU by 3.6%.
- Suntec REIT provides an attractive 2022 distribution yield of 6.5% and trades at a 28% discount to NAV per unit. Maintain BUY. Target price: S$1.78.
Suntec REIT's 1H21 Results
- Suntec REIT (SGX:T82U) reported 1H21 DPU of 4.154 cents (+26.1% y-o-y), which is in line with our expectations. Growth was mainly driven by its office portfolio.
Growth from newly completed and newly acquired buildings.
- Gross revenue and net property income (NPI) grew 11.6% and 23.9% y-o-y respectively due to contributions from newly completed 21 Harris Street (with effect from 6 Apr 20) and 477 Collins Street (with effect from 1 Aug 20) in Australia.
- NPI from Suntec City Mall increased 19.2% y-o-y due to lower rent assistance and recovery of doubtful debts.
- Newly acquired Nova Properties (with effect from 18 Dec 20) in the UK contributed income of S$11.5m.
Stable revenue from Suntec City Office.
- Occupancy at Suntec City Office dropped 2.6ppt q-o-q due to low expiring rent of S$9.03psf.
Suntec City Mall affected by Phase 2 (Heightened Alert).
- Occupancy improved 2.4ppt q-o-q to 93.9%. Negative rental reversion has moderated from 26.2% in 1Q21 to 7.2% in 2Q21. Management expects a negative rental reversion of 15-20% for 2021. Shopper traffic and tenant sales have dropped 49% and 34% y-o-y respectively in 2Q21 due to Phase 2 (Heightened Alert).
- Suntec REIT provided rent assistance for half a month to retailers open for business. The mall is expected to complete the restructuring of leases with lower base rent and higher proportion of gross turnover (GTO) rent in 3Q21.
Benefitting from lower financing cost.
- Suntec REIT’s all-in financing cost has improved 0.2ppt 2.4%. Aggregate leverage remains elevated at 43.1%.
Positive reversion for Suntec City Office in 2021.
- The proportion of workforce working remain stable due to the past 12 consecutive quarters of positive rental reversion.
More mini-anchors at Suntec City Mall.
- Suntec REIT has secured three mini-anchors – Don Don Donki (a discount chain store), HipVan (home furnishing) and SuperPark (an indoor activity park) – which will persist till 1H22.
Acquisition of The Minster Building.
- Suntec REIT has acquired a 100% interest in The Minster Building, a Grade-A 999-year GBP loan (£175m equivalent to S$330.8m) and perpetual securities (S$70m). It is estimated to provide DPU and NAV accretions of 3.6% and 0.7% respectively for pro forma 2020. The acquisition is expected to be completed in Jul 21.
Divestment of strata titles at Suntec City Office.
- Suntec REIT has divested 78,491sf of strata units at Suntec City Office (1.9% of share value in the entire Suntec City Development) for S$197.0m or S$2,510psf. The exit NPI yield was attractive at 3.1%. It will recognise a net gain on divestment of S$13.9m. The divestment is expected to be completed in 3Q21.
Resiliency from Australia due to long leases and rent guarantees.
- 40-50% of the workforce returned to work at the offices in Sydney and Melbourne before lockdown. Rents could come under pressure due to the high nation-wide CBD vacancy rate of 13.6% and new supply coming on-stream. Suntec REIT has long WALE and minimal lease expiry in 2021 and 2022. The vacant spaces at 55 Currie Street (till Dec 21), 21 Harris Street (till Apr 23) and 477 Collins Street (till Jul 25) are covered by rent guarantees.
Upside from capital distribution.
- Suntec REIT's management will consider capital distribution for past divestment gains of S$46m in 2H21.
Suntec REIT - Valuation & Recommendation
- We raised our 2022 DPU forecasts for Suntec REIT by 3.9% after factoring in the acquisition of The Minster Building and divestment of strata units at Suntec City Office. Maintain BUY. Our target price of S$1.78 for Suntec REIT is based on DDM (cost of equity: 6.5%, terminal growth: 1.2%).
- See
- Suntec REIT trades at an attractive discount of 28% to NAV per unit.
- Share price catalysts:
- Positive rent reversion at Suntec Harris Street in Australia in 2021.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-07-25
SGX Stock
Analyst Report
1.78
UP
1.720
