Suntec REIT's 3Q21 in Line Vs MKE, Stay at HOLD: Prefer CICT

• Suntec REIT (SGX:T82U)’s 3Q21 DPU rose 20.8% y-o-y and 5.8% q-o-q, underpinned by the better performances of its office and retail portfolio. While occupancies in Singapore improved, office reversions look set to moderate, with rental outlook weak for retail into FY22E.
• We raised Suntec REIT's DPUs forecast by ~4% and DDM-based target price to S$1.40 (COE: 7.9%, LTG: 1.5%) to reflect the recently completed deals.
• DPU visibility is up from Suntec REIT's overseas diversification but high gearing versus peers and history will cap accretion from further deals. Retained capital distributions and potential divestments will however offer DPU upside. For now, stay at HOLD.
• We prefer CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) due to catalysts from DPU recovery in 2021, and redevelopment upside. Details in: CapitaLand Integrated Commercial Trust - Maybank Kim Eng 2021-10-24: In Recovery Mode; Visible Growth Drivers Into FY22e.

Retail Occupancy Up, Rental Outlook Weak

• Performance at Suntec City mall improved in 3Q21 with revenue up 12.8% y-o-y/2.1% q-o-q and NPI up 75.8% y-o-y/10.3% q-o-q, and occupancy rising to 95.0% (from 93.9% in 2Q21 and 91.5% in 1Q21). Rental reversion however was softer at -11.2% (from -7.2% in 2Q21), and expected to remain weak at -15% in 4Q21, and -10% in FY22.
• Recovery in footfall and tenant sales at -51% y-o-y and -33% y-o-y, will rely on returning physical office occupancies, likely in 2022. SUN expects to keep F&B tenancies to > 25% of the mall’s NLA, and aims to grow experiential concepts to 35% (from 32%).

Singapore Office Reversion Was Strong, Set to Ease

• Suntec REIT’s Singapore office occupancy rose q-o-q from 95.0% to 96.1%, due to Highway caused occupancy to dip to 93.8%, NPI remains cushioned by rent guarantees at 477 Collins and 55 Curry.

High Gearing Limits Accretion From Further Deals

• Suntec REIT's gearing rose to 44.3% from need to be timed with divestments, or equity market performance.

Source: Maybank Kim Eng Research - 25 Oct 2021