Following Suntec REIT's latest 1HFY2022 ended June results announcement on Jul 27, analysts are keeping a rather positive stance on the stock as its outlook seems bright.
During first half period, the REIT saw a 15.8% y-o-y increase in distribution per unit (DPU) to 4.810 cents, on the back of 16.9% y-o-y higher distributable income of $138.1 million and a 22.1% growth in gross revenue to $203.5 million.
The higher gross revenue was mainly due to contribution from The Minster Building that was newly acquired in July 2021. It was also due to the higher revenue from Suntec City, Suntec Singapore, 21 Harris Street and Olderfleet, 477 Collins Street. This was partially offset by lower revenue from 177 Pacifc Highway due to lower occupancy and impact of weaker Australian dollar.
See: Suntec REIT reports 15.8% increase in 1HFY2022 DPU of 4.810 cents
Following that, CGS-CIMB Research is upgrading its call on Suntec REIT to "add" from "hold" previously with an unchanged target price of $1.79. Maybank Securities kept its "buy" call with a target price of $1.85. And Citi Reseach maintains its "neutral" call with a target price of $1.85. OCBC Investment Research too is keeping "hold" on the REIT with a fair value estimate of $1.50.
Retail and convention improvement
During 1HFY2022, retail NPI rose 40% y-o-y to $45.4 million, due mainly to higher occupancy and rents at Suntec Mall, the absence of sinking fund contributions and higher income from Marina Bay
Link Mall. Suntec Convention also turned in a positive $2.9 million profit.
Committed occupancy at Suntec Mall improved to 96.1% at end-1HFY2022 with rental reversions at a positive 3.2% in 2QFY2022 as shopper traffic and tenant sales recovered to 91%/115% of pre-Covid levels. The REIT also has 9.8% of retail leases expiring for 2HFY2022.
CGS-CIMB analyst Lock Mun Yee notes that management has guided that retail rental reversions are expected to remain mildly positive for FY2022.
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To improve tenant mix and traffic flow, the REIT's manager plans to embark on an asset enhancement initiative (AEI) at Level 2 of the East Wing at Suntec Mall. "This exercise, scheduled to be completed by 4QFY2022, will increase leasable space of this area by 13% and generate a projected 15% ROI," says Lock.
Maybank Securities analyst Chua Su Tye says: "An AEI to improve traffic flow and tenant mix at the
east wing by 4QFY2022 should add 13% to its net leaseable area (NLA) and deliver 15% ROI. The
convention business has turned around after 10 quarters, and should reach breakeven for FY2022, before a MICE-led recovery expected next year."
Citi's Brandon Lee is upbeat on the improving convention business, and believes that if this trend continues, profitability in 2HFY2022 could be similar. Meanwhile, he believes that Suntec REIT may look to convert some of its convention space for other uses, but this will be subject to approvals from the Urban Redevelopment Authority (URA).
While Lee notes that tenant retail sales have improved and are somewhat around pre-Covid levels, he notes that there are several tenants that have exceeded pre-Covid by a greater margin, while some are still below pre-Covid levels. "While gross turnover (GTO) rents are above 2019, gross rents (base or fixed + GTO) are about 5% below 2019 (pre-Covid levels), and some tenants may not choose to return to higher proportion of fixed rent too quickly," says Lee.
Meanwhile, the OCBC Investment Research team says: "We expect Suntec REIT to be a beneficiary of the Singapore government’s reopening efforts, and this should provide a boost to its retail, convention and office segments. That said, recovery could be uneven given the fluidity of the situation."
The research team believes that the convention business would need to see larger scale international events before a firmer recovery can happen.
Office growth
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Singapore office contribution, including joint venture (JV) income, grew 10.7% y-o-y to $94 million in 1HFY2022, thanks to better occupancy and rents at Suntec Office, higher JV income from One Raffles Quay (ORQ), partly offset by divestment of Suntec Office strata units.
The REIT also enjoyed positive rental reversion of 5.5% (2Q: +5.7%) for its office portfolio in 1HFY2022, with demand coming from the banking and financial services, technology, media and entertainment, and telecommunications (TMT), manufacturing and distribution and trading and investments sectors.
"We expect reversions could ease, while staying slightly positive, even as Suntec REIT signed rents above $10psfpm, compared to its expiring rents (at $9.31-9.59psfpm) and passing rents ($9.28psfpm)," says Chua.
Suntec REIT has a remaining 5.1% and 26% of office area expiring in 2H2022 and FY2023 and maintains its expectation of achieving single-digit positive rental reversions for this year.
Australia contributions declined 3.2% due to lower occupancy at 177 Pacific Highway and Southgate and weaker Australian dollar, partly offset by higher take-up and rent at 477 Collins St and 21 Harris St. UK contributions benefited from income from the Minster Building and lower retail rent rebates.
"Looking ahead, there are minimal expiries of 5.1% in Singapore, 2.3% in Australia and 1.7% in the UK for 2HFY2022," says Loke.
In terms of potential headwinds from tech layoffs or headcount freeze, the REIT notes there are still a few tech firms looking for expansion space, with a couple moving to IOI Central Boulevard Towers, which Lee sees the possibility of other expansionary name exploring space somewhere.
In 2HFY2022, Suntec REIT thinks there will still be expansionary demand, and while there might be a slowdown sometime, Lee believes that the positive momentum would continue for a while unless recession really sets in and companies turn back significantly or cut back on expansion plans.
While the OCBC Investment Research team expects an improvement in the office segment on the outlook, it is expecting the Singapore office portfolio to register softer positive rental reversions in FY2022 as compared to FY2021, as they factor in concerns from long-term uncertainties over the the impact of work-from-home trends, despite more employees returning to the office.
The research team expects Australia and UK office portfolios to remain resilient, underpinned by firm occupancy and long weighted average lease expiry (WALE), coupled with annual rent escalations in Australia. However, currency fluctuations are key risks to monitor.
Asset recycling efforts
Gearing was slightly lower at 43.1% (from 43.3% as at end-March), while its fixed-rate debt was higher at 56% (from 51%). Its all-in debt cost rose to 2.51% (from 2.31%), and management sees this climbing to about 3% by end 2022, with a 50 basis points (bps) rise in interest cost lowering DPU by 4.6%.
Cap rates across its portfolio were mostly unchanged h-o-h, and Chua believes that the REIT could
prioritise divestments in Australia to reduce leverage, even as it eyes AUM growth in Singapore.
Despite the entrance of ESR Group as its sponsor, there is no change in current acquisition strategy of focusing on office assets with ancillary retail. Furthermore, ESR does not have many Class A commercial assets for Suntec REIT to acquire, though they do have JV partners (which may have assets) to tap on, notes Lee.
Nonetheless, any potential acquisition must be of good quality and result in DPU-accretion based on 60/40% equity/debt, with the REIT unlikely to issue equity at below net asset value (NAV) (currently Suntec REIT is trading at 0.75x P/B), hence near-term acquisitions are unlikely unless funds can be raised via divestments, according to Lee.
To bring down gearing and reposition it for growth, the REIT is looking at divestment of mature assets and still on track for initial target of end-FY2022. While investors are generally cautious, Suntec REIT is seeing big transactions being done and there are still investors with capital to acquire despite rising interest rates. Its assets in Singapore are however not for sale, given they are good quality assets.
Units in Suntec REIT traded at $1.60 at 5.10pm.
