Suntec REIT 2H21 - UOB Kay Hian 2022-01-28: Recovery In Singapore Augmented By Acquisitions In London

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT 2H21 - Recovery In Singapore Augmented By Acquisitions In London

Suntec REIT (SGX:T82U) achieved a recovery at Suntec City Mall with newly-acquired Minster Building and Nova Properties in London contributing significantly. 2H21 DPU growth would be higher at 20.3% y-o-y if we adjust for income of S$10.3m released in 2H20.

The outlook for the office markets in Singapore and London has brightened. Suntec REIT's 2022 distribution yield of 5.9% and P/NAV of 0.73x is attractive. Maintain BUY.

Suntec REIT (SGX:T82U) reported DPU of S$0.04512 for 2H21 (+9.8% y-o-y), which is within our expectations. The good results were driven by:
1. Contribution from two newly-acquired office buildings. Minster Building in London (completed in 28 Jul 21) contributed NPI of S$12.5m. Nova Properties (completed in 18 Dec 20) contributed JV income of S$13.9m.
2. Recovery at Suntec City Mall. NPI from Suntec City Mall grew 54% y-o-y due to lower rental waivers, recovery of doubtful debts of S$1.2m and lower sinking fund. Occupancy was stable at 94.7%. Shopper traffic has recovered since dining in at F&B establishments were allowed for groups of up to five persons on 22 Nov 21. Tenant sales were strong in October and November and surpassed pre-pandemic levels in December. The mall was rejuvenated with 32 new-to-market and new-to-Suntec brands. The focus on dining offerings and activity-based concepts improved shopper traffic. Nevertheless, rental reversion remains negative at 11.8%.
3. Contribution from development project. NPI from newly completed 477 Collins Street in Melbourne increased 44% y-o-y to S$14.3m (contributions kicked in starting 1 Aug 20) and maintained high occupancy of 98.3%.

Occupancy at Suntec City Office and One Raffles Quay (ORQ) improved 1.7ppt and 1.3ppt q-o-q respectively to 97.2% and 98.5% in 4Q21 due to backfilling of space vacated by UBS. Suntec REIT signed new and renewed leases for 719,600sf of office space with positive rental reversion at 3.2% in 2021. Retention rate was 61%. New tenants were mainly from the Technology, Media & Telecommunications and Banking, Insurance & Financial Services sectors.

The two new Grade A Pacific Highway in Sydney (A$75m) and 477 Collins Street in Melbourne (A$29.5m). NAV per unit increased 2.7% y-o-y to S$2.11.

Uptick in leasing momentum. Leasing demand London has recovered to pre-pandemic levels. Resiliency is underpinned by high occupancy, long WALE of 10.4 years, minimal lease expiry until 2027 and limited supply.

We trimmed our 2022 and 2023 DPU forecasts for Suntec REIT by 5% as Suntec REIT trades at an attractive discount of 27% to NAV per unit.
See
Catalysts
- Positive rent reversion at Suntec City Office in 2021.
- 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 Minster Building in London, UK in 2022.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-01-28

SGX Stock Analyst Report BUY MAINTAIN BUY 1.74 DOWN 1.780