Better Fundamentals, Mixed Outlook

• Suntec REIT (SGX:T82U)’s 1H21 DPU rose 16.2% y-o-y, led by the better performance of its office portfolio, which saw maiden contributions from 477 Collins (in Australia) and Nova properties (in the UK). But tightened capacities in Singapore has slowed Suntec mall’s recovery, while negative rental reversions look set to persist into 2H21.
• Suntec REIT’s fundamentals have improved due to its UK diversification efforts, but gearing at 43.1% remains high against peers and history. We maintain our forecasts and DDM-based target price of S$1.25 (COE: 8.2%, LTG: 1.0%). Stay at HOLD.
• We prefer CapitaLand Integrated Commercial Trust (SGX:C38U), with catalysts from DPU recovery in 2021, and redevelopment upside.

Retail Recovery Stalled Amid Heightened Measures

• Performance at its Suntec City mall deteriorated in 2Q21, due to capacity restrictions, with footfall lower at -49% y-o-y (versus -34% y-o-y in 1Q21) and tenant sales on same-store weaker at -34% y-o-y (from -19% y-o-y). Occupancy rose q-o-q to 93.9% (from 91.5%), and is on track to its ~95% target by end- 2021.
• Rental reversion was better at -7.2%, versus –16% in 1Q21 (excluding new anchor leases signed), but should stay negative in FY21 (at -16-20%).
• Rising COVID-19 case numbers have dampened recovery prospects in 3Q21, with the extended rent restructuring reducing near-term DPU visibility.

Office Cushioned by Higher Overseas AUM

• Singapore’s office occupancy dipped q-o-q from 96.1% to 95.0%, largely due to weaker occupancy in Australia (at 93.9%) with 177 Pacific Highway fully let, and rental guarantees for 477 Collins and 55 Curry.

Further Diversification, Gearing Remains High

• Suntec REIT's gearing has fallen in the estimated 3-4% DPU accretion upon completion of the deal in 3Q21.

Source: Maybank Kim Eng Research - 23 Jul 2021