SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT - Speed Bumps, But Stay In For The Long Term
- The return of tightening measures in Singapore is negative for Suntec City mall, and will likely decelerate its office space-leasing momentum in the short term. That said, we remain positive on the long-term fundamentals of its high-quality office portfolio, and maintain that Suntec REIT (SGX:T82U) remains deeply undervalued.
- Suntec REIT is trading at a ~30% discount to its book value. BUY, new S$1.72 target price from S$1.76, 22% upside with 6% FY21F yield.
- Key catalysts: Asset divestments (at a premium to book value) and yield-accretive acquisitions.
Office segment: Long-term outlook still positive.
- Suntec REIT's Singapore office portfolio occupancy rate (2Q) dipped 1.1ppt q-o-q to 95%, mainly due to UBS moving out. Leasing activity, which showed signs of picking up early this year, is likely to slow down – in light of recent tightening measures that led to work-for-home being the default option (in effect from 27 Sep to 25 Oct). However, we remain positive in our long-term outlook – as highlighted in our 23 Aug thematic report titled Workspace: Today, In Transition, Tomorrow – and expect the REIT to benefit from the ongoing flight to quality.
- The underlying strength in the office market is evident, with Grade-A core central business district rental rates (2Q) rising 1.0% q-o-q to S$10.50psf/month, marking the first growth since 4Q19, based on CBRE data. 1H21 portfolio rent reversion was positive (+1%), and should remain so for the rest of the year. Similarly, office capital values have held up well, as seen by the robust transaction activity year-to-date, with Suntec REIT itself having divested two office assets – 9 Penang Road (30% stake) and Suntec City strata office units – at 6% and 9% premiums to their latest valuations.
Retail segment: Occupancy rate stabilising, but rental pressure to persist.
- The outlook for this segment (~20% of Suntec REIT’s income) remains challenging, with more rental rebates likely to be offered in 2H21. We estimate potential rebates (FY21) to be at 3-5% of rental income (ie S$1.5-3m), in addition to short-term rental rate restructuring.
- Suntec City mall’s occupancy rate improved to 93.9% in 2Q, and management expects this to reach 95% by the year-end. Rental rates, however, may stay under pressure, with reversions likely to be at -10% to -20% (1H: -15.3%).
Asset recycling likely to continue
- Asset recycling likely to continue with potential divestments likely in its Australia portfolio (possibly 177 Pacific Highway), following the recent asset divestments in Singapore. Suntec REIT is also exploring potential redevelopment opportunities for Southgate Complex, and repositioning some of its convention centre space to extract better value.
- We lower Suntec REIT's FY21-23F DPU forecast by 2-4%, as we factored in additional rental rebates and longer leasing gaps into our estimates.
- Based on our proprietary in-house methodology, we also derive an ESG score of 3.0 out of 4.0 for Suntec REIT. As this score is in line with the country median score, we did not apply a premium or discount to our DDM-derived intrinsic value.
- See
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2021-09-30
SGX Stock
Analyst Report
1.72
DOWN
1.790
