Suntec REIT - UOB Kay Hian 2022-04-27: 1Q22 Yield Augmented By Capital Distributions In 2022 & 2023


Suntec REIT - 1Q22 Yield Augmented By Capital Distributions In 2022 & 2023

  • Occupancy for the Singapore office portfolio is on an uptrend and improved 0.3ppt q-o-q to 97.8% in 1Q22. Rent reversion at Suntec City Mall was flat, a reversal from a negative reversion of 11.8% in 4Q21. Outlook for the office market has brightened in Singapore and London and stabilised in Australia.
  • Management intends to maintain capital distribution at S$5.8m for eight consecutive quarters. Downgrade Suntec REIT to HOLD as share price has already rallied 22% over the past six months. Target price: S$1.90.

Suntec REIT's 1Q22 Results

  • Suntec REIT (SGX:T82U) reported DPU of 2.391 cents for 1Q22 (+16.9% y-o-y), which is within our expectations. The results included capital distribution from past divestment gains of S$5.8m. Management intends to have a similar level of capital distribution for eight consecutive quarters over two financial years (2022 and 2023).
  • Singapore office: Growth from technology tenants. Net property income (NPI) increased 4.4% y-o-y in 1Q22 due to lower sinking fund incurred at Suntec City Office. Singapore office portfolio saw a pick-up in rent reversion at 5.3% in 1Q22, its 15th consecutive quarter of positive reversion.
  • Occupancy for Singapore office portfolio edged higher by 0.3ppt q-o-q to 97.8% driven by Suntec City Office (+1.4ppt q-o-q to 98.6%) and Marina Bay Financial Centre (MBFC) (+0.3ppt q-o-q to 97.6%). Occupancy for One Raffles Quay (ORQ) eased 2.7ppt q-o-q to 95.8% as an existing tenant relocated to another building within Suntec REIT’s Singapore office portfolio.
  • Management is confident of backfilling the vacant space soon. Occupancy is expected to remain high with moderately positive rent reversion due to high expiry rents.
  • Suntec City Mall: Turned the corner. Occupancy improved 1.3ppt q-o-q to 96% in 1Q22. Rent reversion was flat, a substantial improvement from a negative reversion of 11.8% in 4Q21. Leasing activities has gained traction. Management focuses on activity-based concepts and dining offerings and has introduced eight new brands in 1Q22.
  • Occupancy is expected to be stable at above 95%, while rent reversion should be between -5% to 0% in 2022. Revenue from Suntec City Mall increased 12.9% y-o-y. NPI increased by a higher 33.1% due to an absence of sinking fund contribution at Suntec City Mall.
  • Australia: Resiliency from long WALE of 5.4 years. Occupancy at 21 Harris Street and 477 Collins Street improved 21.1ppt and 1.1ppt y-o-y respectively to 91% and 98.3%. Nationwide central business district (CBD) office vacancy has declined from 14.1% to 13.7%. Effective rents for prime office space in Sydney and Melbourne are expected to improve in 2022.
  • UK: Resiliency from long WALE of 10.4 years. Occupancy at Minster Building is stable at 96.7%. Nova Properties remains fully occupied. Leasing demand at West End and City of London markets have recovered to pre-pandemic levels.
  • Coping with higher cost of electricity. Contributions to the Management Corporation Strata Title (MCST) for Suntec City Complex will increase from S$21.80 to S$32.00 per share value, translating to an increase of S$7m-8m in operating expenses. The increase in revenue from the car park will also help to defray the higher cost of electricity. ORQ and MBFC are not affected as the cost of electricity is fixed for two years in 2022 and 2023.

Deleveraging through portfolio reconstitution.

  • The authorities have approved the planning control amendments to enhance the retail podium and develop a new office tower at Southgate Complex. Management is reviewing the planning parameters and will decide on the optimum mix between office and retail space.
  • Suntec REIT could consider:
    1. Divesting Southgate Complex with the approved redevelopment plan.
    2. Selling Southgate Complex to a JV company to redevelop Southgate Complex.
  • Other options for divestment include 177 Pacific Highway in Sydney (valuation: A$720m) and 55 Currie Street in Adelaide (valuation: A$152m).

Suntec REIT - Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-27
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.90 UP 1.840