Felicia Tan Thu, Jun 23, 2022
UBS analyst Michael Lim has downgraded Suntec REIT to “sell” from “buy” as he sees the REIT as being most exposed to rising funding costs among the counters the brokerage covers.
Lim has also lowered his target price on Suntec REIT to $1.52 from $1.70 previously.
“Our dividend discount model (DDM)-based price target assumes 2.8% risk-free rate (from 2.1%) and 8% cost of equity,” Lim says in his June 20 report.
To the analyst, the REIT’s elevated gearing of 43.7% and low fixed rate hedge of 53% is a concern.
There is also limited scope for upside surprises at present.
“In Suntec’s business update, management raised its retail rent reversion guidance from -10%, to -5% to 0% on improved confidence in the outlook,” he writes.
“With retail peers in the 0% to +3% range, we think Suntec is broadly aligned with the market. Our estimates assume flat reversions for 2022. Occupancy at Suntec Mall is near optimal at 96% which could cap scope for upward revisions,” he adds.
“[Suntec’s] retail exposure is concentrated to a single large mall and we believe could be challenging to actively reposition. Retail peers, in contrast, are diversified across malls which affords more levers for growth,” Lim continues.
In the REIT’s office segment, the analyst also expects to see double digit rent reversion for its Marina Bay assets, while Suntec could be at best a modest positive due to high expiring rents.
“The convention business should move towards a breakeven scenario this year,” he says.
Units in Suntec REIT have rebounded some 11% year-to-date (ytd), outperforming the 7% in retail stocks in Asean on the whole.
The REIT’s higher unit price, which comes as Covid-19 restrictions ease and economies reopen, is also ahead of the Singapore REIT (S-REIT) index by 17 points and the benchmark Straits Times Index (STI) by 11 points.
“At 5.6%, the dividend yield is currently at -0.5 standard deviation below the mean. Yield spread to 10 years (10Y) is tighter at -1 standard deviation below the mean and has reverted to pre-Covid-19 levels. While reopening tailwinds could continue, we think it is more than priced in,” the analyst says.
“While reopening tailwinds could continue, we think it is more than priced in,” he adds.
For the FY2022, FY2023 and FY2024, Lim has adjusted his distribution per unit (DPU) estimates by 4%, -0.3% and -6.8% respectively to factor in the REIT’s capital top-ups of $46 million over the FY2022 to FY2023 and adjusts for a higher proportion of fees paid in cash (50% from 20%).
“The impact of higher utility charges would see management corporation strata title (MCST) contributions rise [by] $7 million in 2023 but it can be partly offset by the return of atrium sales,” says Lim.
“The drop in 2024 DPU is due to the depletion of top-ups. Suntec’s gearing is elevated at 43.7% with a low fixed rate hedge of 53%,” he adds, estimating that an increase of every 100 basis points in rates will have a negative impact on the REIT’s DPU by 9%.
Furthermore, “capital recycling to address gearing could take time as buyers are cautious and there are ample assets in the market,” continues the analyst.
On the whole, Lim sees limited scope for upside surprises and deems the REIT’s risk-reward profile as “unattractive”.
In comparison, he has indicated his preference for its peer, CapitaLand Integrated Commercial Trust (CICT), for its diversified portfolio.