• Suntec REIT's 1H20 DPU of 3.293 Scts was slightly below, at 45% of our FY20F forecast.
• Suntec REIT's office contributions remain resilient, while retail drag persists.
• Reiterate ADD, with a lower DDM-based Target Price of S$1.70.

Suntec REIT’s 1H20 Results Highlights

• Suntec REIT (SGX:T82U) reported 1H20 gross revenue of S$149.4m (-16.1% y-o-y), while income available for distribution fell 28.9% y-o-y to S$92.8m, after a 10% retention and absence of capital distribution. The weaker performance was due to lower contributions from Suntec Mall and Convention, provision for rental assistance for qualifying tenants, and lower income from 177 Pacific Highway on weaker A$, which was partly offset by higher contributions from 55 Currie and 21 Harris in Australia.
• Suntec REIT's 1H DPU dipped 31.3% y-o-y to 3.293 Scts. Book value slipped to S$2.089/unit, mainly due to a revaluation loss for Suntec Singapore.

Office Continues to be Resilient

• Suntec REIT leased out 213.5k sq ft of office space in 1H20, of which 33% are new leases. Suntec Office achieved a rental reversion of +11.4% in 1H (2Q: +9.1%), while committed occupancy stood at 98.1%. Suntec REIT has another 4.9% of office leases expiring in 2HFY20F. We expect the reversion gap to narrow going forward, in view of dampened leasing demand and Suntec REIT’s tenant retention strategy. Suntec REIT estimates the possibility of early termination and rent deferment at 1% and 4% of NLA, respectively, for its Singapore office portfolio in 2H20F.
• Australia office portfolio was stable, with end 1H20 committed occupancy of 93.1%. Suntec REIT estimates 7% of its Australia office NLA could have partial rent rebate or deferment. That said, contributions from 477 Collins St (97% pre-leased at end-1H20) from Aug 2020F could likely offset part of the drag.

Drags From Rental Assistance and Lower Occupancy in Retail

• Within its retail portfolio, Suntec REIT leased/renewed 126.9k sqft of space in 1H20. Suntec Mall achieved a +8.4% reversion in 1H (2Q: -2.4%). Shopper footfall fell 52.6% y-o-y in 1H, although recovered slightly post circuit breaker reopening.
• Suntec REIT extended 1.5 months of rental assistance to its retail tenants in 1H. It estimates the possibility of rent deferment and early termination of leases could come from 5% and 4% of retail by NLA in 2H20F. We believe, this will likely drag on retail occupancy going forward.
• Suntec REIT has a remaining 20.6% of retail space to be renewed in 2HFY20F, and we anticipate negative rent reversion to persist.

Higher Leverage, But Interest Cost Declined in 1H

• Suntec REIT’s aggregate leverage stood at 41.3% at end-1H20, and 68% of its debt are on fixed rates. Average all-in interest cost declined to 2.63% in 1H20, from 3.05% at end-FY19.

Reiterate ADD

• We cut our Suntec REIT's FY20-21F DPU estimates by 2.3-8.4% as we bake in additional rent waivers, slightly lower portfolio occupancy and absence of capital distribution; our DDM-based Target Price is lowered to S$1.70. We think the current Suntec REIT's share price has factored in much of the near-term earnings drag.
• Re-rating catalyst: faster-than-expected recovery of its retail and convention business from Covid-19 disruption.
• Downside risks: higher-than-estimated rental waivers to tenants.

Source: CGS-CIMB Research - 23 Jul 2020