Suntec REIT - OCBC Investment 2021-10-22: Hanging In There


Suntec REIT - Hanging In There

  • Suntec REIT (SGX:T82U)'s 3Q21 DPU jumped 20.8% y-o-y on low base effects.
  • Negative rental reversions for retail to continue.
  • More optimistic on office portfolio.

Suntec REIT's 3Q21 DPU met our expectations

  • Suntec REIT provided an update on its 3Q21 performance. Gross revenue and NPI jumped 16.5% and 45.5% y-o-y to S$92.7m and S$68.8m, respectively. The stronger increase in NPI relative to revenue was due largely to lower sinking fund expenses and less rent assistance.
  • Management said that it had provided approximately one month of rent assistance to its retail tenants in Singapore, which is above the mandatory 0.5 months imposed by the government.
  • 3Q21 DPU came in at 2.232 cents, representing an increase of 20.8% y-o-y, partly due to a low base effect. There was no distribution from capital in 3Q21, and management said that it would prefer to see the COVID-19 situation stabilising first before resuming its capital distributions (~S$46m remaining).
  • For 9M21, Suntec REIT's DPU jumped 24.2% to 6.386 cents. This formed 74.1% of our FY21 forecast, which we consider to be in-line with our expectations.

Continued weakness in retail given high number of COVID-19 cases

  • Although NPI for Suntec REIT’s retail segment saw a significant jump due to a low base, operating metrics remained soft given the COVID-19 situation in Singapore. Suntec City Mall’s tenants’ sales and footfall dipped 24% (-33% on same store basis) and 51% in 3Q21 as compared to 3Q19, even though there was a pick up in recovery pace in Aug and Sep. Negative rental reversions widened to -11.2% in 3Q21, versus -7.2% in 2Q21 (9M21: -14.6%).
  • Management provided an updated guidance, highlighting that rental reversions are likely to come in at -15% for 2021 and -10% for 2022. Given the uncertain operating environment, most of its tenants have adopted a lower base rent plus a higher percentage of gross turnover rent lease structure, thus resulting in the negative rental reversions.
  • Management will seek to curate its mall to include more activity-based and experiential concepts, which are harder to be replaced by e-commerce. Suntec City Mall’s occupancy was 95.0% (as at 30 Sep 2021), and is expected to remain at this level by year end.

Management more positive on office segment, though Australia saw a slight decline in occupancy

  • Suntec REIT’s Singapore office segment saw an improvement in occupancy by 1.1 percentage points (ppt) q-o-q to 96.1%, while rental reversions were solid at +7.3% (9M21: +2.8%). This was driven by the backfilling of the space vacated by UBS, whereby the previous rent was at much lower levels.
  • Management remains optimistic on the outlook of the Singapore office market in 2022 and 2023, given low supply and robust demand from the TMT sector.
  • In Australia, Suntec REIT’s office occupancy fell 1.1 ppt q-o-q to 92.8%. This was due to a tenant returning two floors at 177 Pacific Highway (occupancy fell from 100% to 93.8%), although the same tenant signed a forward renewal of its lease for another five years at positive rental reversions of more than 5%.
  • In terms of financial position, Suntec REIT’s aggregate leverage ratio increased 1.2 ppt q-o-q to 44.3%, which is well above the sector average. We maintain our forecasts and fair value estimate of S$1.58 for Suntec REIT.
  • See

ESG Updates of Suntec REIT

  • Suntec REIT has a positive ranking on ‘Opportunities in Green Building’, as it actively invests in green building certifications for its properties, and is focused on reducing building energy consumption. However, Suntec REIT ranks less favourably on the ‘Governance’ and ‘Human Capital Development’ categories.
  • Suntec REIT lacks an independent-majority board, which may impede the board’s oversight of management. It also trails global peers in executive pay practices.
  • As for human capital management, Suntec REIT’s incentivisation mechanisms to attract and retain talent are lagging those of leading peers.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-10-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.580 SAME 1.580