Suntec REIT
Price targets:
Maybank Securities ‘hold’ $1.15
CGS International ‘hold’ $1.38
OCBC Investment Research ‘hold’ $1.19
Results meet expectations despite 3QFY2024 DPU slip
Maybank Securities, CGS International (CGSI) and OCBC Investment Research (OIR) have maintained their “hold” calls on Suntec REIT following its business update for the 3QFY2024 ended Sept 30.
On Oct 24, Suntec REIT reported a distribution per unit (DPU) from operations of 1.58 cents, 0.9% lower y-o-y. Without capital distributions, the REIT’s 3QFY2024 DPU fell by 11.2% y-o-y.
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The REIT’s 3QFY2024 gross revenue and net property income (NPI) fell by 4.6% and 5.7% y-o-y to $117.7 million and $79.8 million, respectively. This is attributed to the lower contribution from Suntec Convention, 55 Currie Street and The Minster Building properties. However, the drop was partially offset by stronger performance at Suntec Office and Mall.
Suntec’s 3QFY2024 DPU met the expectations of CGSI analysts Lock Mun Yee and Natalie at 25.4% of their FY2024 forecast. Meanwhile, Suntec’s 9MFY2024 DPU of 4.62 cents, 12% lower y-o-y, was in line with OIR’s estimates at 75.2% of the team’s FY2024 estimates. The nine-month DPU was also within the expectations of Maybank analyst Li Jialin, who expects an FY2024 DPU of 6.9 cents.
Li has increased her target price to $1.25 from $1.10 and sees the REIT’s fundamentals improving. There are signs of Suntec REIT’s UK assets bottoming out and improvements in the occupancy of its Australian portfolio.
However, she adds that the REIT’s manager remains “cautious” about a potential $200 million dip in valuations due to cap rates in the Australian market.
The CGSI analysts and OIR team have kept their target prices unchanged at $1.38 and $1.19, respectively.
Suntec’s Singapore office occupancy remained healthy at 99.1% at the end of 3QFY2024, boasting a positive rental reversion of 12.9% on 132,000 sq ft of land leased.
OIR notes that the current signing rents at Suntec City Office range between $10.50 per sq ft per month (psf pm) and $12 psf pm.
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As such, Maybank analyst Li Jialin notes that “positive rent growth of mid-to-high single digit for Suntec offices is expected to extend into FY2025”.
“Strong shopper traffic and stable tenant sales account for strong leasing demand,” Li adds, noting that shopper traffic grew 9% y-o-y while tenant sales fell 1% y-o-y.
CGSI’s Lock and Ong states, “Suntec Convention revenue jumped 16.5% y-o-y to $28.2 million in 1HFY2024, on higher meetings, incentives, conferences and exhibitions (MICE) events and positive tourism outlook.”
Meanwhile, occupancy costs increased to around 23% in 3QFY2024.
OIR notes that management expects its Singapore retail reversions to reach the 15% to 20% range in FY2024 and moderate to a healthy level of 10% to 15% in FY2025.
Furthermore, Maybank’s Li notes that Suntec’s management is planning an asset enhancement initiative of 15,000 sq ft to 17,000 sq ft of retail space at Suntec City Mall, starting in 2H2025. This has an expected return on interest (ROI) of 30% to 40%.
Suntec’s occupancy of its Australia portfolio rose by 1.5 percentage points (ppts) q-o-q to 90.6% in 3QFY2024 due to Southgate and 55 Currie Street.
However, CGSI’s Lock and Ong recognise that “the office leasing environment in Melbourne and Adelaide remains challenging due to elevated vacancy levels and heightened tenant incentives”.
As such, the REIT manager expects a further cap rate expansion of 50 basis points (bps) to 100 bps in its upcoming year-end valuation exercise, leading to a valuation dip of $200 million.
OIR notes that Australia’s 9MFY2024 rental reversions were positive at 13.3%, but they believe this refers to face rent values, and current incentive levels remain high.
Maybank’s Li notes that “backfilling at the UK’s Minister Building is expected to be completed by end-FY2024 and contributions should begin in FY2025 after the incentive periods”.
Suntec REIT also managed to remove all break clauses for FY2025 in its UK portfolio but will have to provide some incentives to tenants in return. — Cherlyn Yeoh
Mapletree Pan Asia Commercial Trust
Price targets:
DBS Group Research ‘buy’ $1.80
Citi Research ‘buy’ $1.47
CGS International ‘add’ $1.53
Staying positive despite mixed 2Q
DBS Group Research, Citi Research and CGS International (CGSI) have maintained their “buy” calls on Mapletree Pan Asia Commercial Trust N2IU (MPACT). Citi has a target price of $1.47, while DBS has upgraded its target price to $1.80 from $1.75. CGSI has downgraded its target price to $1.53 from $1.66.
The analysts note that MPACT had a mixed performance in 2QFY2025 ended Sept 30.
In its announcement dated Oct 24, MPACT announced 2QFY2025 revenue of $255.6 million and net property income (NPI) of $167.7 million, representing a 6.1% y-o-y and 8.5% decline, respectively. MPACT’s 2QFY2025 DPU fell 12% y-o-y to 1.98 cents.
DBS analysts Geraldine Wong and Derek Tan attribute this to the divestment of Mapletree Anson in July, the absence of a property tax refund from a year ago, and the impact of foreign exchange. Furthermore, there were lower NPI contributions from overseas property, with an 11% decline y-o-y led by Japan, South Korea, China, and Hong Kong.
However, DBS’s Wong and Tan note that this was “offset by a stronger performance at Vivocity, supported by lower utility expenses and 2.6% lower net financing costs through debt reduction post divestment”.
Citi analyst Brandon Lee notes that MPACT continues to benefit from positive Singapore rent reversions in 1HFY2025, driven by Vivocity, which had a positive rental reversion of 17.3%. This was supported by mTower/Bank of America HabourFront and Mapletree Business City, which had positive rental reversions of 8.8% and 2.5%, respectively.
Furthermore, he notes that “VivoCity’s tenant sales grew 2% y-o-y in 2QFY2025 following a relatively soft 1QFY2025 from higher outbound travel, though it fell 5% y-o-y due to downtime from ongoing asset enhancement initiatives (AEI) and a higher number of non-trading days due to tenant changeovers or rejuvenation efforts”.
Despite this, DBS’s Wong and Tan have remained positive on MPACT, noting that MPACT’s growth trajectory has yet to be priced in.
Wong and Tan believe that MPACT remains a prime beneficiary of an interest rate cut, with a 100 basis point (bp) cut equating to a potential 2.4% boost to FY2025 distribution per unit (DPU), particularly when benchmark rates in Hong Kong and Singapore are declining.
MPACT’s portfolio occupancy
Overall, portfolio occupancy stood at 90.3% this quarter, representing a 3.7 percentage point (ppt) q-o-q decline. The analysts note that the weaker occupancy can be attributed to its overseas markets.
Citi’s Lee notes that portfolio occupancy in Japan fell by 11.9 ppts due to the non-renewal of an office tenant and retail softness. In comparison, The Pinnacle Gangnam in South Korea’s portfolio occupancy fell by 4.1 ppts due to the non-renewal of a retail tenant.
CGSI analysts Natalie Ong and Lock Mun Yee expect MPACT’s China assets to continue posting negative reversions due to the oversupply in Shanghai and Beijing.
Furthermore, they note that management had commented that rents in the Korean office market may be close to the peak, resulting in a more modest reversion.
Additionally, portfolio occupancy of Festival Walk in Hong Kong declined by 3.2 ppts due to its office component. However, MPACT is in the process of signing up a few leases, so Lee expects it to improve in the next two quarters.
Festival Walk’s negative rent reversion widened q-o-q in 1HFY2025, with 2QFY2025 tenant sales down by 12.5% y-o-y while traffic was up 6% y-o-y and 7% q-o-q.
However, Wong and Tan remain positive on MPACT, noting that MPACT’s growth trajectory has yet to be priced in and that investors are overly concerned about the Festival Walk’s weakness.
Wong and Tan believe that MPACT remains a prime beneficiary of an interest rate cut, with a 100 bp cut equating to a potential 2.4% boost to FY2025 distribution per unit (DPU), particularly when benchmark rates in Hong Kong and Singapore are declining.
They believe that concerns of a further write-off on Festival Walk are “overstated” based on comparable market transactions, which imply that book values are achievable in the current market.
“The sequential improvement in cash flows in 1QFY2025 from Festival Walk signals better times ahead, and with the interest rate overhang tapering off, higher operating cash flows are likely to flow down to the bottom line,” Wong and Tan add. — Cherlyn Yeoh
