Analysts have mixed views on the outlook of Suntec REIT, with RHB and Maybank analysts giving the counter a “buy” and “sell” rating respectively.
In his initiation report, Maybank Kim Eng’s Chua Su Tye has given a target price of $1.20 for the REIT, as he expects “challenging headwinds” for the REIT.
He added that “slow retail recovery and rising office vacancy due to increasing WFH trends suggest weak fundamentals”, in his view.
Chua said retail recovery at Suntec City mall has been sluggish, with 9MFY2020 footfall down 53% y-o-y, flat from 1HFY2020, and 9MFY2020 tenant sales also down 33% y-o-y. The figures put Suntec behind CMT’s (Capital Mall Trust, now Capitaland Integrated Commercial Trust) downtown malls sales at -26% y-o-y.
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Furthermore, 3QFY2020 retail rent reversion fell to -9.4% from -2.4% in 2QFY2020. Chua thinks that Suntec’s plans to rebalance and strengthen its retail tenants’ profile could pressure occupancy to about 90%, down from 93.3% in 3QFY2020, as the convention operations remain loss-making due to a lack of large-scale events in 2021.
Chua also noted that the Singapore office occupancy remains high at 98.1%, but rent reversion moderated to +4.6% from +9.1%, and management expects downsizing trends averaging 10-15% across leases expiring in FY2021-2023.
However, Chua noted the REIT’s inorganic initiative is a silver lining, as contributions rise in 2021 from 21 Harris and 477 Collins in Australia, as well as from the recently-acquired Nova properties in the UK.
“These are likely insufficient to fully offset downward pressure in its existing operation, but could help it wean off capital distributions, which have been supplementing dividends,” he said.
In addition, the REIT raised $200 million in perpetual securities at 3.8% interest to partly fund the Nova acquisition, which lowered pro-forma distribution per unit (DPU) accretion to 3.4% from 4.9%.
Post-deal, gearing rises to about 43%, which is the highest among peers. The REIT is keen on asset recycling to further lower gearing, but Chua sees a neutral DPU impact given weak pricing power in this cycle, and also sees “an overhang from a potential dilutive equity raising as SUN continues to pursue acquisition opportunities.”
On the other hand, RHB Group Research’s Vijay Natarajan is more optimistic on the counter, giving it a target price of $1.79 and calling it his “preferred pick” in the office/retail space for its “attractive valuation” of 0.7x price to book value (P/BV), and earnings recovery from its recently completed and acquired assets.
He notes that Suntec REIT’s office portfolio (66%), which accounts for the bulk of its income, is expected to remain resilient while retail mall earnings should rebound in 2021, given the absence of rental rebates.
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He elaborated Singapore office occupancy remains high at 98.1% y-t-d, while about 348,500 sq ft of leases were signed, of which about 30% are new leases.
Rent reversions, though tapering off, remain at 9% y-t-d and +4.6% for 3QFY2020. Around 33% of office leases are due for 2021, with average rent expiry of $8.78 per sq ft. As the expiring rents are still about 10% below market rates, he expects “flattish to slight positive rent reversions” in 2021.
Natarajan also expects distribution per share DPS to rebound 25% y-o-y in 2021. “The DPS rebound was driven by full-year contributions from Suntec’s recently completed development assets (21 Harris Street, Olderfleet, and 9 Penang Road), absence of rental rebates, and uplift from positive rent reversions signed.” he said.
He also estimates Suntec will resume its capital top-up with the stabilisation of Covid-19 and have assumed $10 million in capital top-ups for 2021.
As at 11.43am, shares of Suntec REIT were trading at $1.54, with an FY2020 P/BV value of 0.74 and dividend yield of 4.8%.
