Suntec REIT (SUN SP) – Resumption of capital distributions
• 1Q22 distribution per unit (DPU) jumped 16.9% year-on-year (YoY) to 2.391 Singapore cents given boost from capital distributions
• Rental reversions flat for Suntec City Mall; +1.9% for Suntec City Office
• Gearing remains high at 43.3% with only 51% of borrowings hedged
1Q22 DPU in-line with our expectations – Suntec REIT’s 1Q22 gross revenue and net property income (NPI) jumped 13.9% and 24.9% YoY to SGD99.2m and SGD74.3m, respectively. DPU increased 16.9% YoY to 2.391 Singapore cents and accounted for 26.2% of our FY22 forecast. Growth was boosted by the resumption of capital distributions which amounted to SGD5.8m, or 0.2 Singapore cents per unit. Excluding this, DPU from operations still grew 7.1% YoY. Management said that it intends to continue its capital distributions evenly over eight quarters (1Q22 to 4Q23), with SGD46m in capital reserves to be paid out (including 1Q22’s declared distribution).
Positive office momentum; improvement in rental reversions at Suntec City Mall – Suntec REIT achieved positive rental reversions of 5.3% across its Singapore office portfolio (including buildings held under joint ventures) in 1Q22, although that of Suntec City Office was softer at +1.9%, versus +2.2% in FY21 and +0.2% in 4Q21. Based on management’s guidance, Suntec REIT’s FY22 office occupancy is expected to remain high but positive rental reversions are expected to moderate given high expiry rents. For retail, Suntec City Mall’s rental reversions came in flat for 1Q22, but this was a significant improvement as compared to 4Q21 (- 11.8%) and FY21 (-14.4%). Management raised its FY22 guidance for Suntec City Mall’s rental reversions to a range of -5% to 0%. Given that some leases have been restructured to incorporate a lower base rent and higher proportion of gross turnover rent, this implies that the effective rent reversion could swing towards the 0% to 3% range if tenants’ sales recovers further from here. Suntec City Mall’s 1Q22 tenants’ sales on a per square foot basis remained below 2019 average levels (for
whole mall and same store basis) in 1Q22, but is likely to gain traction given the Singapore government’s further loosening of community Safe Management Measures (SMMs), such as the elimination of group size limits, all employees being allowed to return to the workplace and capacity limits being lifted for all events except nightlife establishments. As such, management is targeting breakeven for its convention business on its NPI line in FY22.
Gearing still high at 43.3%, with 51% of borrowings hedged – Suntec REIT’s aggregate leverage ratio declined slightly by 0.4 percentage points (ppt) quarter-on-quarter (QoQ) to 43.3% but remained above the S-REITs sector average. It has completed its refinancing requirements for FY22 with a SGD500m sustainability-linked loan secured in Apr 2022. That said, Suntec REIT’s hedged ratio for its borrowings dipped 2 ppt QoQ to 51% and remains low relative to its peers. Management remains comfortable with a hedge ratio of 50-60%. Regarding utility costs, the main impact to Suntec REIT comes from its strata titled properties in Suntec City. It pays management fees to the Management Corporation Strata Title (MCST), and this is expected to increase from SGD16m in FY21 to SGD23-24m from 1 Jan 2023, which we believe is still manageable. We bump up our FY22 and FY23 DPU forecasts by 4.7% and 8.8%, respectively, after
factoring in capital distributions. We raise our riskfree rate assumption from 1.9% to 2.5%, but this is
offset by a lower beta input given continued reopening efforts in geographies which Suntec REIT has exposure to. Our cost of equity assumption moves from 7.2% to 7.0%, while our fair value estimate increases from SGD1.54 to SGD1.61. Notwithstanding our higher fair value and positive developments over reopening efforts, we believe positives are priced in, based on Suntec REIT’s closing price of SGD1.83 on 25 Apr 2022.
ESG Updates
Suntec REIT has an ESG rating since Jan 2019. According to research, Suntec REIT has a positive ranking on ‘Opportunities in Green Building’, as it actively invests in green building certifications for its properties, and is focused on reducing building energy consumption. However, Suntec REIT ranks less favourably on the ‘Governance’ and ‘Human Capital Development’ categories. Research believes Suntec REIT lacks an independent-majority board, which may impede the board’s oversight of management. It also trails global peers in executive pay practices as per ESG Research Criteria. As for human capital management, Suntec REIT’s incentivisation mechanisms to attract and retain talent are lagging those of leading peers. SELL. (Research Team)