<ALERT> Suntec REIT – 1H22 Results Analysis: Strong recovery led by Singapore assets
- 2Q22 DPU +14.7% y-o-y to 2.419 Scts, in line with our estimates, mainly due to contributions from The Minster Building, Nova Properties and capital distribution of S$5.7m. 2Q22 Core DPU (excluding capital distribution) +5% y-o-y to 2.219 Scts.
- Key positives: i) Strong Singapore office reversions and continued positive momentum, ii) Suntec City Mall reversions turned positive, iii) Suntec Convention turned NPI positive with strong pipeline of events, iv) Suntec City Office at 99.4% with signing rents above S$10psf
- Key negatives: i) rising interests rates may moderate DPU growth marginally; ii) ongoing divestment plans but delayed due to changes in market conditions
- Maintain BUY; TP of S$1.90. Suntec has seen strong recovery and growth especially from its Singapore assets as previously expected but rising interest rates may moderate its earnings growth marginally.
Key Operational
| Key Operational Data | 2Q2022 | 1Q2022 | %q-o-q | 2Q2021 | % y-o-y |
| Portfolio occupancies (est) | 96.6% | 96.4% | 0.2 ppt | 94.5% | 2 ppt |
| – SG Office | 97.8% | 97.8% | 0 ppt | 95.0% | 2.8 ppt |
| – SG Retail | 95.7% | 95.2% | 0.5 ppt | 93.8% | 1.9 ppt |
| – AU Office | 95.0% | 94.3% | 0.7 ppt | 93.9% | 1.1 ppt |
| – AU Retail | n/a | 85.6% | n/a | 88.0% | n/a |
| – UK Office | 98.3% | 98.3% | 0 ppt | 100.0% | -1.7 ppt |
| WALE (years) | |||||
| – SG Office | 2.60 | 2.70 | -0.1 | 2.73 | -2.8 |
| – SG Retail | 2.30 | 2.20 | 0.1 | 2.53 | -2.4 |
| – AU | 5.20 | 5.40 | -0.2 | 6.47 | -6.7 |
| – UK | 10.1 | 10.4 | -0.3 | -0.3 | |
| Rental reversions | |||||
| – Suntec City Office | 3.9% | 1.9% | 2 ppt | 2.1% | 1.8 ppt |
| – Suntec City Mall | 3.2% | 0.0% | 3.2 ppt | -7.2% | 10.4 ppt |
| Lease expiries/Rent Reviews (inc vacancies) in FY2022 by NLA | |||||
| – SG Office | 7.3% | 12.5% | -5.2 ppt | 19.4% | -12.1 ppt |
| – SG Retail | 14.1% | 24.0% | -9.9 ppt | 21.9% | -7.8 ppt |
| – AU | 7.3% | 8.5% | -1.2 ppt | 2.3% | 5 ppt |
| – UK | 1.7% | 1.7% | 0 ppt | 1.7 ppt | |
| Suntec City Mall (quarterly) | |||||
| – Footfall | -20.0% | -32.0% | 12 ppt | -49.0% | 29 ppt |
| – Tenant Sales (same store) | 0.3% | -17.0% | 17.3 ppt | -34.0% | 34.3 ppt |
Source: Company, DBS
Key Highlights / observations
A good set of 2Q22 results led by strong recovery from Singapore assets and contributions from newly acquired UK properties; Suntec Convention Center recorded positive NPI for the first time since COVID-19; borrowing costs expected to rise to 3% by year-end
- 2Q22 DPU +14.7% y-o-y to 2.419 Scts, in line with our estimates, mainly due to contributions from The Minster Building and Nova Properties and capital distribution of S$5.7m. 2Q22 Core DPU (excluding capital distribution) +5% y-o-y to 2.219 Scts
- On q-o-q basis, 2Q22 Core DPU +1.3%. Revenue and NPI +5% q-o-q and 6% q-o-q respectively, mainly from SG office (+2.4%) and SG retail (+1.3%). Suntec Convention Center has turnaround to record a positive NPI in 2Q22 since COVID-19 of S$3.4m, close to 2019 levels.
- Gearing improved marginally to 43.1% vs 43.3% in 1Q22
- Average cost of debt increased by 20bps to 2.51%. Management expects cost of debt could increase to 3% by year end, which may see c.2% to 2.5% impact on DPU assuming a half year impact.
Strong recovery seen from Singapore assets; SG office remains robust and strong driving rent growth; working on renewals of Australia properties.
- Portfolio occupancy inched up marginally by 0.2ppt q-o-q to 96.7% mainly from Australia assets (+0.7ppt). Suntec City Office recorded 99.4% occupancy (+0.8ppt q-o-q) while Suntec City Mall was stable.
- Strong rental reversions from Suntec City Office (signing rents >S$10 psf), while Suntec City Mall has turned positive (+3.2%). Singapore office reversions recorded +5.7% while Suntec City Office recorded +3.9%. Signing rents at Suntec City Office is above S$10psf. Suntec City Mall reversions turned positive, +3.2% in 2Q22, a positive turnaround sign for the mall, in our view.
- Moving forward, management expects Suntec City Office reversions to be at positive single digit given higher expiring rents while Suntec City Mall reversions will be between 0% to +5%.
- Singapore Office market remains strong driving rents growth. Tech tenants continue to expand despite concerns of slowing hiring.
- Tenant sales hit up to 15% pre-COVID levels in 2Q22; cautious on inflation impact on spendings. Suntec City Mall’s same store tenant sales in 2Q22 was slightly above pre-COVID levels (103% to 104%) in May and Jun 2022. Shopper traffic has trended upwards to 91% in Jun22. Management is cautious on inflation pressures may weigh down on spending moving forward but believes with more returning to Suntec City Office may offset some of these concerns. Physical occupancy at Suntec City Office is c.40% to 45%.
- Suntec Convention turnaround and recorded its first positive NPI in 2Q22. Suntec Convention held 300+ events in 1H22 and expects these to double in 2H22.
- Australia office market is stable but expect a large expiry (c.25% of NLA) in 2023. Australia office market remains stable however, we note that c.25% of NLA lease will be expiring in 2023. About 11% of the lease will likely renew. However, a large government tenant at 55 Currie will not be renewing (estimated c.7% of 2023 lease expiry) and management is in the midst of backfilling the space. The remaining space largely in 177 Pacific Highway has been receiving good interests.
- Divestment plans (Australia asset) is ongoing but stalled due to the volatile market conditions. Divestment plans are still ongoing but the volatile market conditions have stalled the process. On Southgate Complex, management is re-considering the redevelopment vs divestment plan given market has changed and interest rates have risen.
- Portfolio valuation remains stable at -0.1%, partially impacted by weaker Australian Dollar and GBP. Overall, Singapore office led the higher valuation (+2%) while Australia and UK assets were relatively stable. Management expects cap rates to hold stable.