CGS International (CGSI), DBS Group Research, Maybank Securities and OCBC Investment Research (OIR) have kept their “hold” calls on Suntec REIT following the release of the REIT’s 1HFY2024 results ended June 30.
CGSI, DBS and Maybank have left their target prices unchanged at $1.22, $1.15 and $1.10 respectively, while OIR has increased its target price to $1.15 from $1.06 previously.
According to the OIR team, the REIT’s 1HFY2024 results were “slightly below” expectations.
While gross revenue saw a 1.2% y-o-y increase to $226.9 million, the REIT’s net property income (NPI) fell 1.5% y-o-y to $151 million as better operating performance in Singapore was offset by lower contributions from 55 Currie Street and 177 Pacific Highway in Australia and The Minster Building in the UK.
Although income from joint ventures rose 7.6% y-o-y to $49.7 million, the REIT’s headline distribution per unit (DPU) dipped 12.5% y-o-y to 3.042 Singapore cents.
However, excluding capital distributions, the OIR team notes that Suntec REIT’s 1HFY2024 DPU from operations would have declined by only 1.2% y-o-y, accounting for 49.1% of their initial FY2024 forecast.
“Rental reversions remained solid albeit at a moderated pace for its Singapore retail and office operations in 2Q24,” write the OIR team in their July 26 note.
Suntec REIT’s rental reversions also remained solid albeit at a “moderated pace” for its Singapore retail and office operations in the 2QFY2024, says the OIR team. During the period, the REIT reported yet another quarter of positive rental reversions for its Singapore office and retail portfolios, at a more moderated 7.9% and 20.2%, down from 11.4% and 21.7% in the previous quarter.
Similarly, CGSI analysts Lock Mun Yee and Natalie Ong maintain a positive outlook on the REIT’s “robust” Singapore office portfolio.
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They note that Singapore office assets saw a 9.7% increase in rental reversions in 1HFY2024 on 243 thousand square feet of space leased, while occupancy remained high at 99.3% following demand from smaller space requirements.
Additionally, committed office occupancy for Suntec REIT’s Australia portfolio inched up q-o-q to 89.1% in 2QFY2024 from 99.9% in 1QFY2024.
With part of the vacated space at 55 Currie St under Heads of Agreement, this should translate to an increase in take-up at the property to above 60% upon completion, in the analysts’ view.
“Nonetheless, office leasing environment in Melbourne and Adelaide remains challenging and Suntec REIT expects the lower revenue trend to continue due to leasing downtime and heightened tenant incentives,” add the analysts.
They note that backfilling of vacated space at The Minster is likely to be completed in 2HFY2024, with the additional contributions impacting the REIT’s bottomline from FY2025 onwards.
The analysts add that the REIT’s retail rental reversions “continue to shine” in 1HFY2024, with Suntec Mall’s occupancy standing at 95.6% at end-1HFY2024 and rent reversion seeing a 20.8% increase.
As a result, management has guided that Suntec Mall should continue to benefit from positive rental.
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Meanwhile, Suntec Convention revenue jumped 16.5% y-o-y to $28.2 million in 1HFY2024. This comes on the back of higher meetings, incentives, conferences and exhibitions (MICE); long-term licences and advertising revenue, while NPI rose 45.2% y-o-y to $4.5 million.
That said, DBS Group Research analysts Dale Lai and Derek Tan note that despite a strong turnaround in its underlying portfolio, the REIT will not be spared from higher interest costs.
Due to increasing interest costs eroding its income, approximately 55% of the REIT’s debt has been hedged.
Additionally, the analysts note that Suntec REIT has maintained a gearing level below the 45% limit and has negotiated lower interest coverage ratio (ICR) covenants with lenders to ensure sustainable capital management.
They add: “Management continues to prefer asset divestments over equity fundraising (EFR) should it need to take steps to recap its balance sheet, and shared that the latter is an avenue of last resort.”
Despite Suntec REIT’s 1HFY2024 DPU meeting the analyst’s expectations, Maybank analyst Li Jialin has kept her forecasts and rating unchanged while awaiting catalysts for the REIT.
She notes that the REIT’s backfilling at the Minster Building is expected to be completed in 2HFY2024, with meaningful rental contribution set to kick in from FY2025 onwards.
Management is also aiming to bring occupancy at 55 Currie up to 60% in 2HFY2024, while occupancy at the REIT’s Southgate asset is expected to hover at current level of approximately 87%.
“We think dividend hikes and improving AU/UK portfolio performance will help shore up investor confidence,” concludes the analyst.
RHB and PhillipCapital keep ‘buy’ calls
RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call on Suntec REIT, viewing the REIT’s Singapore portfolio as a “bright spot”,
He notes that the REIT’s office segment continues to outperform market expectations, with its Suntec City Office achieving 100% committed occupancy and a positive rent reversion of 7.9% in 2QFY2024.
Occupancy at the REIT’s Marina Bay office assets has also remained high, achieving a similar positive rent rate growth.
In the analyst’s view, supply remains manageable with active demand from diverse sectors, such as in energy, shipping, consulting and financial services sectors.
He adds that the REIT’s divestment target of strata units at Suntec office towers remains at $100 million for FY2024, with $31.5 million divested in 1HFY2024 at a 27% premium over book value.
“The REIT is also open to divesting 177 Pacific Highway and Southgate Complex in Australia, should a good offer arise,” says Natarajan.
Overall, the analyst has adjusted his FY2024 - FY2025 DPU estimates down by 1% - 2% by tweaking NPI margins while slightly raising his FY2026 - FY2028 forecasts.
As a result, the analyst’s target price remains unchanged at $1.35.
Similarly, Liu Miao Miao from PhillipCapital has kept her “buy” call on Suntec REIT with an unchanged target price of $1.41.
The analyst highlights positive upsides in the REIT’s convention sector with Suntec Convention benefitting from the influx of event-driven tourism.
Although the sector only accounts for 2% of the REIT’s total income, the analyst believes traffic can be redirected to other businesses, such as F&B in Suntec City.
Traffic has since increased by 6% y-o-y in 1HFY2024, returning to pre-Covid levels, which has subsequently boosted tenant sales by 1% y-o-y in the same period.
Overall, the analyst expects rental reversion in Singapore to “hold well”, driven by stable occupancy costs in retail and high retention demand in the office sector.
“Suntec REIT has adjusted its leasing strategy by dividing units into smaller spaces to lower the barrier of entry, which has been proving effective,” says Liu.
As a result, the analyst has maintained her FY2024 - FY2025 DPU estimates at 6.2 cents - 7.5 cents
