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Analysts mixed on Suntec REIT, some expect deterioration, while others foresee recovery

Lim Hui Jie
Lim Hui Jie1/27/2021 02:51 PM GMT+08  • 6 min read
Analysts mixed on Suntec REIT, some expect deterioration, while others foresee recovery
Analysts are divided over the future of Suntec REIT as different brokerages gave three different ratings on the stock.
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Analysts are divided over the future of Suntec REIT as three different brokerages gave three different ratings on the stock.

Maybank Kim Eng analyst Chua Su Tye was the most bearish on the stock, maintaining a “sell” rating and a target price of $1.19.

Chua said in his note that he expects “further deterioration ahead” for the REIT, noting while retail recovery gained pace in 4QFY2020, rising office vacancy due to increasing WFH trends suggest ‘weak fundamentals’ into FY2021.

He highlighted that retail recovery at Suntec City mall was led by better footfall in 4QFY2020 at -41% y-o-y, compared to FY2020 figure of -50%, as well as tenant sales (between -12% and -19% YoY on same-store basis), which were similar to CapitaLand Integrated Commercial Trust’s (CICT) downtown malls at -16% y-o-y.

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However, 4QFY2020 retail rent reversion fell further to -10.8% from -9.4% in 3QFY2020, while occupancy declined q-o-q from 93.3% to 90.1%.

Management expects rental reversion to stay negative in FY2021 at between 8-12%, with the convention operations remaining loss-making, as the review exercise completes in a few months.

Meanwhile, Suntec’s Singapore office occupancy fell from 98.1% to 96.7%, as rent reversion moderated to +3.7% from +4.6%, but with downsizing trends (3% of its NLA) to be balanced off by expansion from technology sector tenancies.

The REIT’s overseas assets under management (AUM) remain a silver lining, as contributions rise from 21 Harris and 477 Collins in Australia, with office occupancy “resilient” at 94%, and 177 Pacific Highway and Southgate fully occupied.

This is in addition to its Nova properties in the UK, which is fully occupied and is expected to contribute 7% and 11% to Suntec’s AUM and income in FY2021

“We see an overhang from a potential dilutive equity raise as it continues to pursue acquisition opportunities, given its high gearing at about 44%, and valuations at 0.7x P/B” Chua said.

On the other hand, RHB analyst Vijay Natarajan is bullish on the stock, maintaining his “buy” call and a target price of $1.79.

He said management is confident that the worst of the Covid-19 pandemic’s impact on its assets is likely over, and expects numbers to improve ahead.

He noted distribution per unit (DPU) in FY2020 fell 22% YoY on rental rebates and tenant assistance packages, no contributions from Suntec Singapore Convention & Exhibition Centre and the lack of a capital top-up of $26 million in FY2019.

But he expects DPU to grow 23% y-o-y in FY2021, driven by the absence of rental rebates, full contributions from development assets, and acquisitions.

This is on the assumption of a capital top-up of $10 million, as management alluded that it will restart capital top-ups, barring a further deterioration in the pandemic.

Natarajan also thinks that office space demand is still strong, and positive rental reversions are likely to continue in FY2021.

SEE:Suntec REIT announces 12.8% lower 2H20 DPU of 4.109 cents; 22.1% lower FY20 DPU of 7.402 cents on absence of capital distribution

Management noted an uptick in office demand recently, especially from tenants looking for premium space at slightly cheaper rates.

He revealed new demand for office space has been mainly from technology, media and telecommunications companies, and financial institutions, and expansion in demand more than offset the downsizing and pre-termination of leases by tenants.

While Suntec City’s office occupancy rate dropped by 1.4 percentage points q-o-q, its FY20 95.6% rental reversion was at a healthy 7.7%. Rental reversions for 2021 are expected to be in the low single digits, aided by low expiring leases and delays in upcoming office supply.

For the retail segment, tenant sales (same-store basis) improved to 81% of pre-pandemic levels in 4Q2020. While the committed occupancy rate dipped to 90.1% as at end-Dec 2020, management expects this to increase progressively to above95% by end-2021, as it has been negotiating with a few big retail tenants.

Natarajan also believes that management is “cognisant” of the REIT’s high gearing, and is looking to divest some of its mature assets to enhance the debt headroom.

He said a potential near-term divestment target is 9 Penang Road (30% stake), which is valued at $279m. The REIT is also looking at potential redevelopment options for Southgate Complex in Australia and has submitted development applications to the authorities.

CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei are also similarly optimistic, maintaining their “add” call with a higher target price $1.76 from $1.73.

In addition to the factors mentioned above, Lock and Eing highlighted a more positive outlook for the office segment, while saying the retail and convention segments “remain challenging.”

Lock and Eing noted that retail segment NPI declined 51.1% to $22.7million in 2HFY2020 due mainly to lower revenue and provision for doubtful debt at Suntec Mall. There was also a $2 million loss from Suntec Convention.

Furthermore, they noted that Suntec Mall has a remaining 20.2% of leases expiring in FY2021, and “anticipate the negative rent reversion to persist even while occupancy is projected to trend higher by end FY2021.”

Furthermore, the analysts said short term rent restructure will be mitigated by higher turnover rent. Given the slower tourism recovery, Suntec is undertaking a comprehensive business review to identify medium- and long-term opportunities to pivot Suntec Convention’s core business.

OCBC Investment Research straddles the middle ground among all the brokerages, giving a “hold” rating and raising its fair value to $1.59.

The team is of the view that Suntec’s convention segment’s performance will continue to be adversely impacted by the Covid-19 pandemic. Its Singapore office portfolio is expected to achieve positive rental reversions, although at a smaller magnitude as compared to FY2020.

They elaborate that Suntec Convention is expected to continue its struggles in 2021, given continued border restrictions. Management is exploring various strategies on repositioning the Convention space, and it could take 3-6 months to come up with a proper strategy.

For Office, Suntec REIT expects consolidation and downsizing of space by some tenants from larger financial institutions and within the shipping, energy and resources sectors.

However, this could be offset by expansion from the technology, media, and telecom (TMT) and pharmaceutical sectors. They said there are also “uncertainties” over the longer-term impact of work from home trends.

On a brighter note, In Australia, Suntec REIT’s office portfolio is expected to be resilient, underpinned by firm occupancy and long weight average lease expiry (WALE), although the AUD volatility remains a risk.

As at 12.46 pm, shares of Suntec REIT were trading at $1.55, with a FY2021 Price to Book ratio of 0.75 and dividend yield of 5.37%, according to CGS-CIMB.

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