Suntec REIT: Hop-ful for peaceful rabbit year ahead
- FY22 DPU +2.5% y-o-y to 8.884 Scts, in line; 4Q22 core DPU (excluding capital distribution) -5% y-o-y due to higher interest costs and impact of weaker AUD and GBP
- Key positives: i) positive rental reversions doubled in 4Q22 at Suntec City; ii) portfolio valuation held relatively stable, supported by Singapore assets
- Key negatives: i) higher interest costs; ii) ICR fell below 2.5x, gearing at 42%; iii) weaker AUD and GBP
- Headwinds priced in; maintain BUY with TP of S$1.60
- 4Q22 DPU -13% y-o-y to 1.99 Scts, mainly impacted by higher interest cost, higher management fees in cash (50% vs. 20% in FY21), and weaker AUD and GBP, partially offset by the capital distribution of S$5.8m. 4Q22 Core DPU (excluding capital distribution) -5% y-o-y to 1.79 Scts.
- FY22 DPU +2.5% y-o-y to 8.884 Scts, mainly due to capital distributions paid out in FY22, in line with our FY22 estimates.
- On a q-o-q basis, 4Q22 revenue and NPI +9% q-o-q and +11% q-o-q, respectively, held up by the Singapore portfolio (NPI +11%q-o-q), partially offset by the weaker AUD and GBP.
- Suntec Convention Centre continued to see a performance recovery, with 4Q22 NPI of S$5.6m, which is back to the pre-pandemic level (4Q19 NPI was S$5.4m).
- Gearing lowered to 42.4% vs. 43.1%. ICR declined to 2.4x vs. 2.5x in 3Q22.
- Average cost of debt increased by 18bps q-o-q to 2.94% (FY22 cost of debt increased by 59 bps). 4Q22 cost of debt stood at 3.6%. Hedging ratio improved to 66% from 56% in 3Q22.
Strong recovery seen from Singapore assets, especially Suntec City Mall and Suntec Convention Centre (coming out from low base); portfolio valuation stable, held up by Singapore assets.
- Portfolio occupancy inched up marginally by 1ppt q-o-q to 98%, mainly from Singapore assets (office +0.4ppt; retail +1.6ppt). Suntec City Office occupancy inched up further to 99.9% and Suntec City Mall occupancy improved +1.6ppt to 98.3%.
- Suntec City Mall and Suntec City Office positive reversions doubled q-o-q. Singapore office reversions shot up, recorded +10.6% in 4Q22 while Suntec City Office recorded +7.7%. Suntec City Mall recorded stronger reversions, +10.6% vs. +4.8% in 3Q22, as recovery continues.
- Tenant sales (whole mall) peaked in Sep 22 but maintained high at 117% in Dec 22. Suntec City Mall’s same-store tenant sales were maintained c.4% above pre-COVID levels in 4Q22 (stable q-o-q). Shopper traffic inched up to c.89% of pre-COVID levels in Dec 22.
- Australia office occupancy improved q-o-q with positive reversions, but portfolio performance was weighed down by leasing downtime and higher incentives. Suntec’s Australia office occupancy has improved by 2.4ppt to 97.6% (177 Pacific Highway recorded 100% occupancy) and recorded 24.3% positive reversion in FY22. However, leasing downtime and higher incentives weigh down on portfolio performance. Management will look to AEIs or the creation of fully fitted office suites to improve tenant experiences.
- UK portfolio remains stable. While the UK portfolio remains stable given its long WALE, recessionary challenges may continue to weigh down on the office market. The management is proactively managing leases to maintain occupancy and asset value.
- Portfolio valuations held relatively steady (-0.1% q-o-q), mainly led by higher valuations from Singapore assets (+3.3%), while Australia and UK saw its portfolio valuations decline by 2.1% and 6.4%, respectively.
- Singapore cap rates held relatively steady while Australia and UK expanded by 17bps to 28bps. Singapore office saw cap rates compress by 5bps while Australia cap rates expanded by 0 to 25bps (mainly in Sydney). Nova Properties expanded 17bps while Minster Building expanded 28bps, as the West End market has lower vacancies compared to Central in London.
- Actively looking at potential divestment of mature assets to strengthen balance sheet. The potential divestment of mature assets in Australia is expected to resume when the transaction market picks up again when interest rates stabilise.
Outlook
- Expect positive rental reversions in 2023 for Singapore retail to be 5% to 10% while Singapore office is expected to moderate to 4% to 5%.
- Optimistic on the retail and Suntec Convention recovery with a stronger 2H23 as China reopens and travel picks up. Management expects Suntec Convention to recover close to 80% and fully recover in 2024.
- Despite tech demand for office space having moderated, management believes demand from family offices (albeit smaller bite size) and recovery of some industries (such as shipping or logistics) will remain.
- Management is confident that it can renew or backfill c.10.7% of 16.5% of the lease expiries in its Australia properties. Management will remain active and look to engage in some AEIs or install fully fitted suites to fill the remaining c.9% (including vacant space).
- In Singapore office, 19.2% of the leases are expiring in 2023, comprising 32% from the TMT sector, of which 25% is at a low risk of non-renewal. Downsizing/return of space impact is only 1% to 2% of the TMT portfolio. As such, the slowdown in the tech sector has not impacted Suntec’s office portfolio significantly for now.
- Management will maintain its management fees paid in cash at 50%.
- Management expressed that they would delay the remaining capital distributions of S$23m to maintain the balance sheet and for capital management.
- Despite the ICR ratio having fallen below 2.5x, management expects gearing can remain at the current levels of 42%-43%. Management reiterated that they do not intend to raise any equity funding based on the current situation.
- As part of its capital management initiatives, management intends to negotiate with banks for more ICR buffer, to below 2x.
- Suntec expects the refinancing of debt expiring in 2023 (c.13.3% of total debt) to see a 50bps to 100bps increase in interest costs.
Maintain BUY; TP of S$1.60. We maintain our BUY rating and TP of S$1.60. We delay the payout of the remaining S$23m from FY23 to FY24-FY25, thus, lowering our FY23 DPU estimates by 8% and raising FY24 DPU estimates by 4%.
Despite the challenging macroeconomic conditions, we believe Suntec’s strong Singapore portfolio will continue to support the performance with growth riding on the return of Chinese tourists to Singapore. Suntec has maintained its capital management ratio despite rising interest rates, and we believe management will actively ensure capital management will be sustainable until interest rates stabilise, which appears to be soon. Currently, Suntec is trading at c.0.6x P/B, below -1SD of its historical range. At these levels, we believe most of the headwinds are priced in.
| FY Sep | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
|---|---|---|---|---|---|
| Gross revenue | 191 | 204 | 224 | 16.9 | 9.9 |
| Property expenses | (49.3) | (50.6) | (60.9) | 23.5 | 20.2 |
| Net Property Income | 142 | 153 | 163 | 14.7 | 6.5 |
| Other Operating expenses | (33.2) | (33.5) | (33.6) | 1.2 | 0.2 |
| Other Non Opg (Exp)/Inc | 6.66 | 4.10 | 3.99 | (40.0) | (2.7) |
| Net Interest (Exp)/Inc | (51.2) | (47.8) | (64.5) | (25.8) | (34.9) |
| Exceptional Gain/(Loss) | 26.1 | 54.3 | 11.1 | (57.5) | (79.6) |
| Net Income | 149 | 234 | 121 | (19.1) | (48.5) |
| Tax | (22.5) | (8.72) | (7.52) | (66.6) | (13.8) |
| Minority Interest | (14.5) | (4.02) | (16.8) | (15.9) | 318.1 |
| Net Income after Tax | 112 | 221 | 96.3 | (14.1) | (56.5) |
| Total Return | 350 | 276 | 201 | (42.5) | (27.0) |
| Non-tax deductible Items | (214) | (142) | (88.4) | (58.7) | (37.8) |
| Net Inc available for Dist. | 129 | 138 | 117 | (9.0) | (15.0) |
| Growth & Ratio | |||||
| Net Prop Inc Margin (%) | 74.2 | 75.1 | 72.8 | ||
| Dist. Payout Ratio (%) | 100.0 | 100.0 | 100.0 |
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