Accretive asset recycling paying-off

  • Strong 3Q21 results with DPU +21% y-o-y / +6% q-o-q led by contributions from newly acquired / completed assets, above our estimates.
  • Key positives: i) Strong SG office rent reversion, ii) Suntec City Office signing rents at S$10psf for very good spots, iii) tenant sales / footfall heading towards 80% / 60% of pre-COVID levels in Sep21, iv) Management sanguine on Singapore office until FY23. 
  • Key negatives: i) retail recovery could be rocky with extended restrictions; ii) decline in AU occupancy; iii) capital distributions / divestments could be delayed
  • Suntec has delivered good results from the recent accretive acquisitions (without raising equity), which has yet to be fully priced in, in our view. We believe Suntec will progressively ride on the reopening trend (local and tourists) in FY22 and is an attractive acquisition / privatisation target.   
  • Maintain BUY; TP of S$1.90 

Strong 3Q21 results led by contributions from newly completed / acquired assets; retail remains challenging given the extended restriction 

  • 3Q21 DPU +21% y-o-y to 2.232 Scents, largely due to contributions from newly acquired (UK assets) and completed assets (477 Collins St) and lower rental relief. 
  • 9M21 DPU of 6.386 Scts (+24% y-o-y) is ahead of our FY21 estimates as we have factored in higher rental relief following the resurgence of COVID-19 pandemic and extended lockdown. 
  • 3Q21 Revenue and NPI grew 17% y-o-y and 46% y-o-y respectively while contributions from JV grew 34% y-o-y, largely due to contributions from newly acquired / completed assets.
  • On a q-o-q basis, 3Q21 revenue and NPI grew 16% and 30% while contributions from JV fell 7%. 3Q21 DPU +6% q-o-q.
  • Gearing inched up marginally to 44% vs 43% in 2Q21. Average cost of debt fell 0.1 ppt q-o-q  to 2.32% vs 2.41% in 2Q21
  • NAV remains stable q-o-q at S$2.047 vs S$2.062 in 2Q21 and S$2.055 in 4Q20. 

Key highlights

Key Operational Data3Q20212Q2021%q-o-q3Q2020% y-o-y
Portfolio occupancies (est)95.0%94.5%0.4 ppt96.2%-1.2 ppt
– SG Office96.1%95.0%1.1 ppt98.1%-2 ppt
– SG Retail94.9%93.8%1.1 ppt93.4%1.5 ppt
– AU Office92.8%93.9%-1.1 ppt94.0%-1.2 ppt
– AU Retail85.6%88.0%-2.4 ppt91.7%-6.1 ppt
– UK Office98.3%100.0%-1.7 pptn/a98.3 ppt
WALE (years)     
– SG Office2.792.730.12.21-2.2
– SG Retail2.482.530.06.40-6.5
– AU5.796.47-0.7n/an/a
– UK10.9n/an/an/an/a
Rental reversions     
– Suntec City Office7.3%2.1%5.2 ppt 4.6%2.7 ppt 
– Suntec City Mall -11.2%-7.2%-4 ppt -9.4%-1.8 ppt 
Lease expiries/Rent Reviews (inc vacancies) in FY2021 by NLA   
– SG Office5.9%12.8%-6.9 ppt 24.5%-18.6 ppt 
– SG Retail7.3%14.0%-6.7 ppt 18.9%-11.6 ppt 
– AU7.9%7.8%0.1 ppt 5.0%2.9 ppt 
– UK1.7%n/an/a n/an/a 
Suntec City Mall     
– Footfall-51.0%-49.0%-2 ppt -53.0%2 ppt 
– Tenant Sales-33.0%-34.0%1 ppt -33.6%0.6 ppt 

(+) Office portfolio occupancy improved marginally; strong rental reversions in 3Q21; management sanguine on office outlook until FY23

  • Portfolio occupancy saw slight uptick q-o-q mainly from Singapore assets (+1ppt for both office and retail) while Australia and UK assets saw decline in occupancy.
  • Both Suntec City Office and ORQ saw improved vacancy while MBFC’s occupancy fell marginally by 0.7ppt q-o-q to 96.8%
  • Suntec City Office recorded strong 3Q21 rental reversions of +7.3% vs +2.1% in 2Q21 and -0.9% in 1Q21. 9M21 rental reversions +2.8%. Management continues to expects FY21 rental reversions to remain positive. Signing rents in 3Q21 ranges between c.S$9.00 to S$10.00psf. Premium office locations demanding close to S$10.00psf is very encouraging and appears to indicate some recovery in rents.
  • Management continues to see market rent recovery and expect demand from growth sectors and strong recovery of FDI in Singapore on the back of limited supply to drive rent recovery.
  • TMT and Financial Services continue to lead new leading demand and continue to see expansion, with TMT especially continue to show strong demand. Management remains positive on the Singapore office market until FY23 and do not foresee risks in upcoming supply.
  • Management has received enquiries on potential vacancies at MBFC (Standard Chartered Bank’s space expected to give up c.200k sqft/c.50%; lease expiring in 4Q2022), mainly from TMT sector and believes this is a positive opportunity for strong positive rental reversions as expiring rents are low.

(-) Retail portfolio recovery remains rocky with extended restrictions; m-o-m tenant sales improvement with Sep21 approaching 80% of 2019 levels; expect occupancy to remain stable but rent reversions to remain weak. 

  • Suntec City Mall’s occupancy improved further to 95% vs 93.9% in 2Q21. Management expects mall occupancy to remain stable by end-2021 despite the extended restricted COVID-19 measures.
  • 3Q21 rental reversions remains challenging at -11.2% (ex-anchor tenant: -10%) vs -7.2% 2Q21 and -26.2% in 1Q21 (ex-anchor tenant: -16.0%). 
  • 3Q21 tenant sales and footfall remains relatively stable q-o-q, both impacted by the recent restrictions. However, we note that both tenant sales and footfall has improved m-o-m since restrictions were progressively relaxed from phase 2 (HA). Sep21 saw tenant sales and footfall approaching 80% and 60% vs 2019 levels.  
  • Management do not expect major impact from the Vaccination-Differentiated Safe Management Measures (SMM) and will extend additional rent assistance for 2nd phase 2 (HA). 
  • Management expects to provide another 0.5 months of rent relief for its tenants given the extended restrictions (total in FY21 would be 1 month and provided in 3Q21).

(-/+) Australia portfolio supported by rent guarantee; emerging trends of ‘flight to quality’ bodes well for newly completed CBD office. 

  • AU office assets saw occupancy fell 1.1ppt q-o-q at 92.8% mainly from 177 Pacific Highway (-6.2ppt q-o-q to 93.8% from 100%) and Southgate (-3.7 ppt q-o-q to 91.7%).
  • The decline in occupancy at 177 Pacific Highway was mainly led by an anchor tenant returning 2 floors with surrender fees of c.A$2m. However, Suntec successfully negotiated forward renewal of the lease to 2030 with strong positive reversions of c.+5%.
  • Return to office has been dampened by the recent lockdowns in Sydney and Melbourne and would only expect majority to return in early 2022. Return to workforce in Adelaide reached c.70%
  • While flexible remote working arrangement remained, management saw emerging trend of ‘flight to quality’ would benefit new CBD office assets (such as 21 Harris St and 477 Collins St).
  • Australia office rental income continues to be largely supported by rent guarantee from 3 assets (55 Currie St – expiring in Nov21, 21 Harris St and 477 Collins St) and low lease expiries in FY22 at < 3%. Despite the rent guarantee, occupancies at these buildings continue to trend up (21 Harris expected to hit 90% in FY22)

(+) Return to work in UK has improved to c.50% post the lockdown ended in Apr21; leasing activities improving especially at prime locations. 

  • Return to work in the UK has improved to c.50% for the month of June since lockdown ended in April21.
  • Management saw improving trends in leasing activity especially in West End and City of London.

(-) Capital distributions delayed depending on the recovery from COVID-19 

  • Given the recent uncertainty from the resurgence, management may consider to delay the capital distributions (remaining S$46m) further to next year to conserve some cash.