1Q22: Yield Augmented By Capital Distributions In 2022 And 2023
Occupancy for the Singapore office portfolio is on an uptrend and improved 0.3ppt qoq
to 97.8% in 1Q22. Rent reversion at Suntec City Mall was flat, a reversal from a negative
reversion of 11.8% in 4Q21. Outlook for the office market has brightened in Singapore
and London and stabilised in Australia. Management intends to maintain capital
distribution at S$5.8m for eight consecutive quarters. Downgrade to HOLD as share
price has already rallied 22% over the past six months. Target price: S$1.90.
RESULTS
• Suntec REIT (SUN) reported DPU of 2.391 S cents for 1Q22 (+16.9% yoy), which is within
our expectations. The results included capital distribution from past divestment gains of
S$5.8m. Management intends to have a similar level of capital distribution for eight
consecutive quarters over two financial years (2022 and 2023).
• Singapore office: Growth from technology tenants. Net property income (NPI) increased
4.4% yoy in 1Q22 due to lower sinking fund incurred at Suntec City Office. Singapore office
portfolio saw a pick-up in rent reversion at 5.3% in 1Q22, its 15th consecutive quarter of
positive reversion. Occupancy for Singapore office portfolio edged higher by 0.3ppt qoq to
97.8% driven by Suntec City Office (+1.4ppt qoq to 98.6%) and Marina Bay Financial Centre
(MBFC) (+0.3ppt qoq to 97.6%). Occupancy for One Raffles Quay (ORQ) eased 2.7ppt qoq
to 95.8% as an existing tenant relocated to another building within SUN’s Singapore office
portfolio. Management is confident of backfilling the vacant space soon. Occupancy is
expected to remain high with moderately positive rent reversion due to high expiry rents.
• Suntec City Mall: Turned the corner. Occupancy improved 1.3ppt qoq to 96% in 1Q22.
Rent reversion was flat, a substantial improvement from a negative reversion of 11.8% in
4Q21. Leasing activities has gained traction. Management focuses on activity-based
concepts and dining offerings and has introduced eight new brands in 1Q22. Occupancy is
expected to be stable at above 95%, while rent reversion should be between -5% to 0% in 2022. Revenue from Suntec City Mall increased 12.9% yoy. NPI increased by a higher
33.1% due to an absence of sinking fund contribution at Suntec City Mall.
• Australia: Resiliency from long WALE of 5.4 years. Occupancy at 21 Harris Street and
477 Collins Street improved 21.1ppt and 1.1ppt yoy respectively to 91% and 98.3%.
Nationwide central business district (CBD) office vacancy has declined from 14.1% to 13.7%.
Effective rents for prime office space in Sydney and Melbourne are expected to improve in
2022.
• UK: Resiliency from long WALE of 10.4 years. Occupancy at Minster Building is stable at
96.7%. Nova Properties remains fully occupied. Leasing demand at West End and City of
London markets have recovered to pre-pandemic levels.
• Coping with higher cost of electricity. Contributions to the Management Corporation Strata
Title (MCST) for Suntec City Complex will increase from S$21.80 to S$32.00 per share value,
translating to an increase of S$7m-8m in operating expenses. The increase in revenue from
the car park will also help to defray the higher cost of electricity. ORQ and MBFC are not
affected as the cost of electricity is fixed for two years in 2022 and 2023.
STOCK IMPACT
• Deleveraging through portfolio reconstitution. The authorities have approved the
planning control amendments to enhance the retail podium and develop a new office tower at
Southgate Complex. Management is reviewing the planning parameters and will decide on
the optimum mix between office and retail space.
• SUN could consider:
a) Divesting Southgate Complex with the approved redevelopment plan.
b) Selling Southgate Complex to a JV company to redevelop Southgate Complex.
• Other options for divestment include 177 Pacific Highway in Sydney (valuation: A$720m) and
55 Currie Street in Adelaide (valuation: A$152m).
EARNINGS REVISION/RISK
• We raised our 2022 and 2023 DPU forecasts by 3% and 2% respectively as the quantum of
capital distribution was higher than anticipated, which was partially offset by the increase in
MCST contributions for Suntec City Complex in 2023.
VALUATION/RECOMMENDATION
• Downgrade to HOLD after share price rallied 22% over the past six months. Our target price
of S$1.90 is based on DDM (cost of equity: 6.5%, terminal growth: 1.2%). SUN trades at a
discount of 14% to NAV per unit of S$2.13.
SHARE PRICE CATALYST
• Employees returning to work at Suntec City Office and resumption of events at Suntec
Convention to trigger a recovery in shopper traffic and tenant sales at Suntec City Mall.
• Full-year contributions from Minster Building in London, UK in 2022