SINGAPORE (June 9): With Phase 2 reopening of Singapore’s “circuit breaker” measures anticipated to take place earlier than expected, DBS Group Research analysts Rachel Tan and Derek Tan have reiterated their “buy” call on Suntec REIT as the return of workers to their offices is likely to improve prospects for Suntec City Mall and the REIT’s office buildings.
The Covid-19 pandemic had seen Suntec REIT hit hard by circuit breaker measures due to its exposure to Suntec City Mall and several office buildings within its portfolio.
For 1Q20, revenues fell 3% y-o-y to $87 million while Net Property Income (NPI) fell 7% y-o-y to $54 million, driven primarily by a 10% y-o-y decline in NPI from the mall. A weak Australian Dollar (AUD) also affected earnings from Suntec’s Australian holdings, though earnings from 55 Currie Street have mitigated losses.
Relief measures for renters have weakened earnings -- 7% of Suntec REIT’s office portfolio’s net lettable area (NLA) are likely to request rent deferments while a mere 1% are expected to seek early lease termination.
Suntec City Mall has waived rent for April and May 2020, with around 6-8.7% of the mall’s NLA to seek rent deferment or early termination respectively. Suntec City Convention Center may extend its temporary closure, hitting conference and events earnings while events and meetings may recover in 2H20.
While Australian law requires landlords to grant rent relief to SMEs hit by Covid-19, Suntec’s Australian assets are less likely to be affected as 87% of its portfolio Down Under is leased to large corporations, government tenants and businesses that are not expected to be impacted by the measures.
Suntec expects partial rent rebates and deferment to be granted to the approximately 7% of office tenants who may be affected by the measure while around 6% of eligible retail SME tenants are likely to receive a full rent rebate.
“Our ballpark estimates are that [around] 15% of Suntec’s NPI and JV contribution could be impacted either with rent deferment of six months, rent rebates of up to three months and early termination,” conclude the two Tans. Distribution per unit (DPU) for 1Q20 fell 28% y-o-y to 1.76 cents due to lower contributions from operations affected by COVID-19 and Circuit Breaker, with Suntec REIT keeping 10% of distribution income and holding back capital distribution.
Nevertheless, while the analysts have cut their target price from $2.15 to $1.81, attractive valuations amid market recovery could see Suntec REIT prove a bargain.
With the REIT currently valued at 0.7 price-to-net asset value (P/NAV), close to below one standard deviation, the analysts believe that the worst is over for Suntec REIT. Predicting a 13% upside, they argue that the REIT faces limited downside risks and is poised to ride on a recovery.
Thus far, weak retail performance at Suntec City Mall is also ripe for a turnaround. With renewed focus to drive optimise portfolio tenant mix over the past few years, tenant sales and foot traffic have improved due to the introduction of new-to-market retail brands, improved marketing, greater number of events, as well as better engagement with its tenants,” they comment, noting that 10 consecutive quarters of positive rental reversions and tenant sales growth of around 0.7% in FY19 could contribute to higher rents and income.
Suntec REIT’s financial position is sound as it remains within the 50% gearing limit set by the Monetary Authority of Singapore (MAS), with Suntec City Mall having the option to draw down a month’s worth of cash security deposits in June 2020. Its gearing ratio increased to 39.9% vs 37.7% in 4Q19 for new property developments and acquisitions in Australia, as well as due to a weakening of the AUD.
“Management expects gearing to increase to 41.5% by end-1H20 post the completion of acquisition of 21 Harris St on 6 Apr 2020 and 477 Collins Street [in Australia],” note the analysts. Going forward, management expects to maintain 40-42% gearing levels with acquisitions and could explore possible divestments in order to further solidify its financial position.
Occupancy rates for Suntec’s Singapore office portfolio is likely to remain robust; while the current 98.8% occupancy rate is likely to fall, the analysts do not expect occupancy to fall below around 95%. Suntec City Mall will likely be worse hit, as occupancy falls from 98.3% to somewhere around 90% as a result of the Covid-19 shock to retail business.
“We believe [that Suntec’s] prime Grade A office is relatively more resilient and well-positioned for potential economic recovery. Suntec Office has the advantage of ample car parking spaces, connectivity to two MRT stations and a wide choice of amenities,” say the analysts.
Weaker occupancy is expected in Australia as the country faces its first recession in three decades, but its new properties in Australia will help pick up the slack.
Suntec properties have been working to the number of expired leases it will experience for FY20. Suntec City Office has renewed or concluded 52% of leases expiring in FY20 while 5.5% of leases expiring in FY21 have been renewed early, bringing down leases expiring this financial year from 20% to 8.6%. Suntec City Mall has renewed or completed about a third of leases expiring in FY20, with lease expiries reduced to just over a quarter from 41%.
Going forward, Suntec REIT will have the opportunity to acquire one of two office towers to be built at Park Mall, which it is redeveloping in a joint venture after selling it for $412 million in 4Q15. UBS will be the anchor tenant for the redeveloped property, providing steady income for Suntec REIT through a 30% stake it owns in the joint redevelopment venture. Its new acquisitions in Australia will also provide an earnings uplift in the medium-term.
As of 4.05pm, Suntec REIT is trading at $1.60 with a dividend yield of 4.73% and a price-to-earnings ratio of 12.24.
