Suntec REIT - UOB Kay Hian 2022-04-18: Upside From Reopening & Redevelopment Projects

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Upside From Reopening & Redevelopment Projects

Suntec City Office has secured tenants relocating their regional HQs from Hong Kong to Singapore. Suntec City Mall benefits from the return of office crowds in 1H22 and the return of tourists in 2H22. We have factored in capital distribution of the divestment gain from 9 Penang Road at S$20m each in 2022 and 2023.
Suntec REIT (SGX:T82U) provides 2022 distribution yield of 5.5% and trades at a discount of 15% to NAV per unit of S$2.11. ESR Cayman was installed as the new sponsor. Maintain BUY.

Suntec City Office has received more concrete enquiries from multinational companies seeking to relocate their regional headquarters from Hong Kong to Singapore. Samsonite has expanded its footprint at Suntec City Office in 4Q21. New Balance has relocated to Singapore and became a new tenant at Suntec City Office in 1Q22. We expect occupancy at Suntec City Office to edge higher by 0.8ppt q-o-q to 98% in 1Q22.
Potential tenants lined up for available space at MBFC Tower 1. Standard Chartered Bank is expected to return 200,000sf of office space over nine floors at MBFC Tower 1 in 4Q22. We understand that a technology company has committed to take up 100,000sf of the vacant space. Other potential tenants for backfilling include companies from media and financial services industries. Management expects strong rental reversion for the vacated space as Standard Chartered Bank, being an anchor tenant, pays lower rent.

The authorities have approved the planning factored in capital distribution of S$20m each in 2022 and 2023.

ESR Cayman has completed the acquisition of ARA Asset Management, including subsidiary LOGOS, for US$5.2b in Jan 22. Its AUM has expanded more than three-fold to US$140b. The acquisition has propelled the enlarged group to the largest real asset manager in the Asia Pacific region and third largest listed real estate investment manager globally.
Founders and senior management continue to be the largest shareholder with a combined 23% stake in ESR Cayman. Warburg Pincus is the largest institutional shareholder with a 13.2% stake.
Riding on a larger platform. With ESR Cayman as the new sponsor, Suntec REIT would be able to tap on a larger platform and network to support its future growth.

According to CBRE, office rents for Grade A core CBD increased 3.8% to S$10.80psf/month in 2021. Net absorption has reversed from negative 0.07m sf in 1H21 to positive at 0.59m sf in 2H21. Demand was driven by technology companies and non-bank financial institutions, such as private wealth and asset managers despite companies adopting hybrid working arrangements. The two sectors accounted for 52% of leasing volume. Occupancy for Grade A core CBD inched higher by 1.2ppt to 93.3% in 2H21 due to the flight to quality.
Grade A offices within core CBD benefitting from lack of supply. According to CBRE, total supply of office space is estimated at 3.76m sf over the next three years (2022-24), equivalent to 1.25m sf per year and 13.4% below the 10-year historical average new supply of 1.45m sf. New supply is expected to pick up in 2023 assuming IOI Central Boulevard Towers is completed on schedule in 4Q23. CBRE expects office rents for Grade A core CBD to increase 6.9% to S$11.55psf/month.
Office properties accounted for 82% of SUN’s NPI in 4Q22.

We raised our 2022 and 2023 DPU forecasts for Suntec REIT by DDM (cost of equity: 6.0% (previous: 6.5%), terminal growth: 1.2%).
See
Share price catalysts:
- 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/ 2022-04-18

SGX Stock Analyst Report BUY MAINTAIN BUY 1.88 UP 1.740