SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
Suntec REIT - 3Q22 Held Back By Higher Interest Rates & Weaker GBP
- Suntec REIT achieved stronger operational performance in occupancies and rents across its office and retail portfolios. DPU from operations declined 15.6% y-o-y due to higher interest rates, weakness of the GBP and a higher proportion of asset management fees paid in cash.
- Suntec REIT's management intends to maintain capital distribution at S$23m for two years. 2023F distribution yield is fair at 5.5%, although P/NAV of 0.66x is attractive. Maintain HOLD recommendation on Suntec REIT. Target price: S$1.39.
Suntec REIT's 3Q22 results below our expectations.
- Suntec REIT (SGX:T82U) reported growth in gross revenue and NPI of 15.7% and 12.1% y-o-y respectively, driven by Suntec City in Singapore and The Minster Building in the UK. Distributable income dropped 5.8% y-o-y to S$60.0m (distribution from operations: $54.2m, capital distribution: $5.8m). DPU declined 6.6% y-o-y to 2.084 cents (DPU from operations: 1.884 cents, DPU from capital: 0.200 cents).
- 17th consecutive quarter of positive reversion for offices. The Singapore office portfolio registered positive rental reversion of 5.9% for 3Q22. New tenants were predominantly from Technology, Media & Telecommunications (52%) and Banking, Insurance & Financial Services (31%). Tenant retention was healthy at 58%. Occupancy at Suntec City Office hit a high of 99.6%. Management expect to maintain positive rental reversion at Suntec City Office due to low expiring rents at S$9.28psf/month in 2023. One Raffles Quay and MBFC Towers 1 & 2 maintained high occupancies of 100% and 98.5%.
- F&B operators provide uplift to rental reversion. Suntec City Mall registered positive rental reversion of 5.6% in 3Q22 (average vs average), the second consecutive quarter of positive reversion. Leasing demand was driven by Food & Beverage (F&B) operators. New F&B tenants include Eggslut, Grande Whisky Museum, Café Usagi and Tai Er. Management expects positive rental reversion of 3-5% in 2023.
- Affected by adverse movement in exchange rates. NPI from Australia office properties declined 17.2% y-o-y to S$19.3m in 3Q22 due to lower occupancy of 93.8% at 177 Pacific Highway and 6.3% depreciation of AUD against S$. In the UK, contributions from Minster Building grew 36.6% y-o-y (up 59.1% y-o-y in GBP) but declined 3.7% for Nova Properties (grew 9.1% in GBP) due to massive depreciation of GBP of 12.3% against S$.
- Suntec Convention: nascent recovery gaining momentum. Revenue increased four-fold y-o-y. NPI turned positive for the second consecutive quarter at S$2.8m in 3Q22. Suntec REIT generated revenue from corporate events and conferences. International MICE events are returning although on a smaller scale.
- Australia: Resiliency from long WALE of 5.0 years. Occupancy for Australia office portfolio improved slightly by 0.2% q-o-q to 95.2%. Effective rents for prime office space in Sydney and Melbourne are expected to improve due to flight to quality but small increase in CBD office vacancy is expected. Suntec REIT will create fully-fitted office suites to attract new tenants.
- UK: Resiliency from long WALE of 9.9 years. Occupancy at Minster Building is stable at 96.7%. Nova Properties remains fully occupied. There is minimum lease expiry until 2027. Occupancy for the office market at Central London is expected to maintain stable occupancy at 92.2% due to limited supply. However, concerns over recession and higher interest rates could have a negative impact on capital values.
- Aggregate leverage remains elevated at 43.1%. Cost of debts has increased 0.9ppt y-o-y to 3.2% in 3Q22. Cost of debts is expected to reach about 3.5% in 4Q22. Suntec REIT has hedged 58% of its borrowings to fixed rates. Management estimated that every 50bp increase in interest rates will reduce distributable income by 5.1%.
- Suntec REIT's manager has elected to receive 50% of asset management fees in units, compared to previous 80% last year. The change reduces distributable income.
Reopening positive for office and retail portfolios.
- Management expects continued office rent growth underpinned by tight office supply and flight to quality in Singapore. Suntec City Office should maintain high occupancy and achieve positive rental reversion in 2023. Suntec City Mall will benefit from the recovery in Mice activities and tourist arrivals in 2023.
- Management expects China to reopen its borders in 2Q23, which will provide a shot in the arm for MICE activities and tourist arrivals in Singapore.
Office recovery has strengthened and broadened.
- According to CBRE, office rents for Grade A core CBD increased 8.9% y-o-y and 2.7% q-o-q to S$11.60psf/month in 3Q22. This is the sixth consecutive quarter of sequential growth and has surpassed the pre-pandemic peak of S$11.55psf/month set in 4Q19.
- Strength in the office market was driven by the reopening with all employees allowed back to their workplaces since 26 Apr 22. Net absorption was strong at 0.56m sf. Leasing activities were driven by technology companies, flexible workspace operators and non-bank financial institutions. New projects Guoco Midtown and Central Boulevard Towers attracted fresh pre-commitments.
Enhancing Suntec City Mall.
- Suntec REIT plans to enhance East Wing Level 2 of Suntec City Mall to improve tenant mix and traffic flow. The asset enhancement initiative will add NLA of 7,000sf and is expected to be completed by Nov 22. Capex is estimated at S$2m.
Suntec REIT – Earnings forecast revision and recommendation
- We cut our 2023 DPU forecasts for Suntec REIT by 13% due to higher cost of debts, steep depreciation of GBP against the S$ and paying 50% of asset management fees in units (previous: 80%). We expect cost of debt to hit 3.7% by 2H23.
- See
- Maintain HOLD. Our target price of S$1.39 is based on DDM (cost of equity: 7.25%, terminal growth: 1.8%). Suntec REIT's Share Price trades at a discount of 34% to NAV per unit of S$2.10.
- Catalysts:
- Positive rent reversion at Suntec City Office in 2023.
- Employees returning to work at Suntec City Office and resumption of events at Suntec Convention could trigger recovery in shopper traffic and tenant sales at Suntec City Mall.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-10-27
SGX Stock
Analyst Report
1.39
DOWN
1.570
