Placement Risk, Stay at SELL

• Suntec REIT (SGX:T82U)’s 1Q21 DPU rose 16.2% y-o-y, due to contributions from 9 Penang Road, and 21 Harris Rd and 477 Collins Rd in Australia, and better performance at the MBFC properties.
• Suntec REIT's retail recovery has eased off as management targets occupancies in 2021 rather than higher rents, while lower Singapore office occupancy suggests weak fundamentals into FY21. Its rising overseas contributions (in Australia and the UK) remain a silver lining.
• We see an overhang from a potential dilutive equity raising as Suntec REIT seeks acquisition opportunities, given its high ~44% gearing, and valuations at 0.7x P/B. Stay at SELL with a DDM-based target price of S$1.25 (COE: 8.2%, LTG: 1.0%).

Retail Eased From 4Q20

• Performance at its Suntec City mall softened in 1Q21 from the seasonally stronger 4Q20, with footfall lower at -34% y-o-y (from -41% y-o-y) and tenant sales on same-store weaker at -19% y-o-y (from -12% y-o-y).
• While occupancy improved q-o-q to 91.5% (from 90.1%), rent reversion deteriorated further to -26.2% with the new anchor tenancies, and lower base rents (at -16% rental reversions) for its renewal leases (vs -10.8% in 4Q20).
• Suntec REIT's management expects occupancy to improve to ~95% by end-2021, but for rent reversion to stay negative in FY21.
• We expect the convention operations to remain loss making, even as the review exercise will be completed in a few months’ time.

Office Cushioned by Higher Overseas AUM

• Suntec REIT's Singapore office occupancy dipped its Australian properties, and helped by the stronger AUD, cushioned its office portfolio revenue and NPI.
• Office occupancy was stable at 93.9% (vs 94.0% in 4Q20), with 177 AUM and income in FY21, behind Australia at 16% and 21% respectively.

Gearing Highest Among Peers

• Suntec REIT's leverage was power for its Australian assets in this cycle. Acquisition growth will likely be constrained by its weak balance sheet and we see an overhang from a potential dilutive equity raising.

Source: Maybank Kim Eng Research - 26 Apr 2021