1Q22 Business Update: Solid recovery!
- A solid 1Q22 results with DPU +17% y-o-y with the top up of 0.2 Scents of capital distributions, in line.
- Key positives: i) Suntec City Office rent reversions +1.9%, ii) Suntec City Mall rent reversions is flat with recovery in occupancy, iii) Strong Singapore retail recovery in both revenue and NPI, iv) Suntec Convention losses have narrowed closer to breakeven
- Key negatives: i) MBLM and Southgate occupancy decline; ii) high gearing on rising interest rates
- Suntec delivered a strong recovery in 1Q22. We believe it will continue to ride on the reopening recovery; and is an attractive acquisition / privatisation target. However, at current share price, EFR could be an additional funding option for Suntec.
- Maintain BUY; TP of S$1.90
| Summary of results | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Revenue | 99.2 | 98.6 | 1% | 87.1 | 13.9% |
| NPI | 74.3 | 73.2 | 2% | 59.5 | 24.9% |
| Income contribution from JV | 30.9 | 26.6 | 16% | 27.8 | 11.2% |
| DI | 68.7 | 65.3 | 5% | 58.1 | 18.2% |
| DPU | 2.391 | 2.280 | 5% | 2.045 | 16.9% |
| Gearing | 43.3% | 43.7% | -0.4 ppt | 44.4% | -1.1 ppt |
| Average cost of debt | 2.31% | 2.35% | 0 ppt | 2.40% | -0.1 ppt |
| DSCR | 2.6 | 2.6 | – | 2.7 | (2.7) |
Key Operational
| Key Operational Data | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Portfolio occupancies (est) | 96.4% | 96.0% | 0.4 ppt | 94.7% | 1.7 ppt |
| – SG Office | 97.8% | 97.5% | 0.3 ppt | 96.1% | 1.7 ppt |
| – SG Retail | 95.7% | 94.6% | 1.1 ppt | 91.5% | 4.2 ppt |
| – AU Office | 94.3% | 94.2% | 0.1 ppt | 93.9% | 0.4 ppt |
| – AU Retail | 85.6% | 85.6% | 0 ppt | 90.3% | -4.7 ppt |
| – UK Office | 98.3% | 98.3% | 0 ppt | 100.0% | -1.7 ppt |
| WALE (years) | |||||
| – SG Office | 2.70 | 2.67 | 0.0 | 2.96 | -2.9 |
| – SG Retail | 2.20 | 2.28 | -0.1 | 2.56 | -2.6 |
| – AU | 5.40 | 5.60 | -0.2 | 6.54 | -6.7 |
| – UK | 10.4 | 10.4 | 0.0 | 0.0 | |
| Rental reversions | |||||
| – Suntec City Office | 1.9% | 0.2% | 1.7 ppt | -0.9% | 2.8 ppt |
| – Suntec City Mall | 0.0% | -11.8% | 11.8 ppt | -26.1% | 26.1 ppt |
| Lease expiries/Rent Reviews (inc vacancies) in FY2022 by NLA | |||||
| – SG Office | 12.5% | 16.6% | -4.1 ppt | 18.4% | -5.9 ppt |
| – SG Retail | 24.0% | 23.3% | 0.7 ppt | 21.1% | 2.9 ppt |
| – AU | 8.5% | 2.7% | 5.8 ppt | 2.3% | 6.2 ppt |
| – UK | 1.7% | 1.7% | 0 ppt | na |
Strong recovery, led by both Singapore office and retail on rent reversions and tenant sales; AU/UK office saw market recovery with UK leasing demand recovering to pre-COVID levels.
- Capital distributions have returned after pausing for 2 years during the pandemic and to be distributed over next 2 years. Suntec has restarted capital distributions and topped up 1Q22 DPU by 0.2 Scents, S$5.8m (a little lower than S$6.5m per quarter previously). Management expects to distribute the remaining S$46m (as at end-2022) in the next 2 years (c.S$5.8m per quarter).
- Portfolio occupancy saw slight uptick of 0.4ppt q-o-q to 96.4% mainly from Suntec City Mall (+1.3ppt q-o-q) and Suntec City Office (+1.4ppt q-o-q), partially offset by some decline in Southgate (0.9ppt q-o-q) and MBLM (5.6ppt q-o-q).
- Strong rental reversions from Suntec City Office while Suntec City Mall recovered to flat reversions from -11% previously (effective rents is +3%). Singapore office reversions recorded +5.3% while Suntec City Office recorded +1.9%. Suntec City Mall saw reversions flat, improved to -c.11% previously. Effective rents (with higher contributions from GTO following the recovery of tenant sales) was +3%.
- Moving forward, retail reversions to be in the range of -5% to 0% but effective rents could be in flat to positive level with stronger GTO. Retail tenants are still cautious with rising costs, such as labour cost. As such, management expect retail reversions to be in the range of -5% to 0% but effective rents could potential be flat to positive with stronger recovery in GTO.
- Tenant sales improved to c.96% of pre-COVID levels. Suntec City Mall’s same store tenant sales in 1Q22 was c.85% of pre-COVID levels while shopper traffic was close to c.70%.
- AU / UK office saw market recovery with 55 Currie St achieved 99% occupancy. Office market conditions have improved in both AU and UK with leasing demand in West End and City of London markets recovering to pre-COVID levels. 21 Harris St and 477 Collins St continue to be supported by rent guarantees
- Losses from Suntec Convention is close to breakeven at -S$0.5m NPI in 1Q22 vs -S$2.5m NPI in 1Q21. Management see strong demand from local corporate events and Dinner & Dance event. International MICE events will take a while to recover given longer time needed for planning.
- Minimal impact from utility costs in 2022; will raise MCST fee in 2023 to cover higher utility costs. Suntec has locked in utility contracts with expiries in mid-2022, end-2022 and 2023. Management do not expect significant impact in 2022 and will raise MCST fee (by S$7m) in 2023 to cover current higher utility costs.
- Interest rates sensitivity – +25bps increase in interest rates will lead to <2.5% impact on DI.
- Divestment plans (likely overseas assets) is ongoing with EFR could be an additional funding option at current share price. Divestment plans are still ongoing but given the current share price, EFR is an additional funding option for Suntec to consider to potentially reduce gearing aside from accretive acquisitions.