UOB Kay Hian (UOBKH) is maintaining its ‘buy’ call on Suntec REIT at a revised target price of $1.75.
This is up 10 cents from its previous $1.65 call and is believed to give the counter a 19.9% upside from its $1.46 price on Oct 23, analysts Jonathan Koh and Loke Peihao say in a note.
The move follows the removal of the REIT’s equity fundraising in its 3Q2020 ended September.
In this time, the counter announced a distribution per unit (DPU) of 1.848 cents, down 21.9% from the previous year due to the rental waivers given to retail tenants at its Suntec City Mall in Singapore and Southgate Complex in Australia.
It was also burdened by the absence of contributions from events held at its Suntec Convention & Exhibition Centre.
See: Suntec REIT reports 21.9% drop in 3Q DPU to 1.848 cents on lower distributable income
Suntec REIT’s portfolio comprises properties offering space for office, retail and conventions in Singapore and Australia. Aside from its facility at Suntec City, the REIT has ownership at One Raffles Quay, the Marina Bay Financial Centre (MBFC) properties as well as a facility at 9 Penang Road, IN Singapore.
Along with three properties in Australia, the REIT had $10.5 billion of assets under management from its facilities operating across 5.3 million sq ft as at June 30.
Koh and Loke note that operations at the Suntec City Office has been “more resilient than anticipated” with revenue and net property income (NPI) increasing 8% and 15% quarter-on-quarter to $33.8 million and $24.4 million respectively in 3Q2020.
The facility has also signed new and renewed leases with a net lettable area (NLA) of 135,100 sq ft, while positive rental reversion moderated to 4.6% during the quarter.
“This is the 10th consecutive quarter of positive rent reversions. New demand came from technology, media & telecommunications (58%) and banking, insurance & financial services (18%). Occupancy at Suntec City Office was stable at 97.0%,” observe Koh and Loke.
Interestingly, the duo note that the Suntec City mall has been benefitting from the return of workers to offices as seen from the rebound in its revenue and NPI by 42% and 78% quarter-on-quarter to $21 million and $9.1 million respectively.
Meanwhile, the REIT has diversified into the UK through a sale and purchase agreement to acquire a 50% interest in Grade A office buildings under Nova Properties for an agreed value of £430.6m (S$766.5m).
These have a total NLA of 559,000sf and a long leasehold tenure of 1,042 years.
The buildings are located opposite the Victoria Station, an important interchange for the London Underground network and the second busiest railway station in the UK.
The management are looking to finance this acquisition through a combination of perpetual securities and loans, note Koh and Loke.
For one, the REIT has issued S$200m of fixed-rate subordinated perpetual securities with an interest rate at 3.8%.
“Management estimates the acquisition is accretive to 1H20 DPU by 3.4% with funding from perpetual securities ($200m) and bank loans (£200m loan denominated in GBP and S$217.9m loan denominated in Singapore dollars),” says Koh and Loke.
“Aggregate leverage is elevated at 41.5% as of Sep 20. We foresee the aggregate being maintained near current levels post-acquisition of Nova Properties, as cash holding was high at $355m as of Jun 20”.
Koh and Loke add that the management will also explore opportunities to divest properties to deleverage the acquisition.
Going forward the duo say the outlook for office spaces is positive.
“Management is optimistic about demand for office space arising from Chinese technology giants setting up their regional headquarters in Singapore,” they note adding that ByteDance has taken up a space at One Raffles Quay and is looking to expand further.
To this end, Suntec REIT’s management is optimistic about maintaining positive rental reversion as average expiring rent is lower at $8.78psf pm in 2021.
As at 5.29pm units in Suntec REIT were up 10 cents or 0.7% to $1.45.
