Suntec Reit – Held Back By Higher Interest Rates

Excerpts from UOBKayHian report

Suntec Reit (SGX: T82U)

• Operationally, management has done a superb job by generating positive rental reversion of 5.7% for the Singapore office portfolio and 3.2% for Suntec City Mall.
• Income from its JVs (MBFC, ORQ and Nova Properties) grew 5.5% yoy.
• Management intends to maintain capital distribution at S$23m per year for two years.
• Although 2022 distribution yield of 6.3% and P/NAV of 0.75x are attractive, we await a more opportune time to re-enter the stock.

Maintain HOLD. Target price: S$1.72.

Suntec Reit first half results

Suntec Reit reported DPU of 4.81 S cents for 1H22 (+15.8% yoy), which is below our expectations due to higher interest expense. The results included capital distribution from past divestment gains of S$11.5m.

Singapore office: Benefitting from office upcycle

NPI increased 9.5% yoy in 1H22. The Singapore office portfolio maintained positive rental reversion at 5.7% in 2Q22, its 16th consecutive quarter of positive reversion. It completed 316,100sf of new leases and renewals. New tenants were mainly from banking & financial services (27%), technology, media & telecommunications (19%) and manufacturing & distribution (16%). Occupancy for the Singapore office portfolio was stable at 97.8%. Occupancy for Suntec City Office improved 0.8ppt qoq to 99.4%, while occupancy for One Raffles Quay (ORQ) eased 2.0ppt qoq to 93.8%. Positive rental reversion could moderate in 2H22 due to higher expiry rents of S$9.59psf/month.

Suntec City Mall: Traffic begets sales

Gross revenue increased 21% yoy in 1H22. Shopper traffic and tenant sales have recovered since the easing of COVID-19-related restrictions in Apr 22. Tenant sales were 15% above pre-pandemic levels in Jun 22. Rental reversion turned around to a positive 3.2% in 2Q22. Occupancy inched marginally higher by 0.1ppt qoq to 96.1%. Management focuses on activity-based concepts and dining offerings and has introduced seven new brands in 2Q22. Management expects footfall to improve with atrium events, workers returning to their offices and the return of convention and tourist crowds. Occupancy is expected to maintain at above 95%.

Valuation/Recommendation

Maintain HOLD. Our target price of S$1.72 is based on DDM (cost of equity: 7.0%, terminal growth: 1.8%). SUN trades at a discount of 25% to NAV per unit of S$2.13. Positive rent reversion at Suntec City Office in 2022. 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

You can find the full report here and the company website here