• Suntec REIT achieved DPU growth of 20.8% y-o-y with a recovery at Suntec City Mall, growth from 477 Collins Street in Melbourne and contributions from Minster Building and Nova Properties in London. Its office portfolio benefits from cumulative positive reversions in the past 13 quarters.
• Suntec City Mall will be repositioned for activity-based and experiential concepts.
• Suntec REIT provides attractive 2022 distribution yield of 6.5% and trades at a 22% discount to NAV. Maintain BUY.

Suntec REIT Reported 3Q21 Results

• Suntec REIT (SGX:T82U) reported DPU of 2.232 cents for 3Q21 (+20.8% y-o-y), which is within our expectations. The good results were driven by:
  1. Suntec City Mall meeting guidance for occupancy of 95%. NPI from Suntec City Mall grew 76% y-o-y due to improvement in occupancy of 1.1ppt q-o-q to 95%, lower rental waivers, recovery of doubtful debts and lower sinking fund. Retention rate improved to 58% in 3Q21, compared with 49% in 1H21. It incurred negative rental reversion of 11.2% in 3Q21 (-10% if we exclude anchor leases). Shopper traffic and tenant sales have recovered in August and September.
  2. Contribution from development project. NPI from the newly-completed 477 Collins Street in Melbourne doubled y-o-y due to full quarter contributions (contributions kicked in starting 1 Aug 20) and improvement in occupancy of 1.7ppt q-o-q to 98.3%.
  3. Contribution from two newly-acquired office buildings. Minster Building in London (completed in 28 Jul 21) contributed NPI of S$4.1m. Nova Properties (completed in 18 Dec 20) contributed JV income of S$8.2m.
• Earnings were boosted by one-off surrender fee of about A$2m from an anchor tenant at 177 Pacific Highway.

Gradually Backfilling Space Vacated by UBS

• Occupancy at Suntec City Office recovered 1.9ppt q-o-q to 95.5% due to backfilling of space vacated by UBS with technology tenants relocating from AXA Tower, which is being redeveloped. It registered strong positive rental reversion of 7.3% in 3Q21 due to low passing rent for the UBS space (smaller new tenants provide higher rentals on a psf basis).
• Occupancy at One Raffles Quay (ORQ) edged higher by 0.5ppt q-o-q to 97.2%. Occupancy at ntre (MBFC) eased 0.7ppt q-o-q to 96.8% due to reduction of space by a financial institution upon lease expiry.

Benefitting From Lower Financing Cost

• Aggregate leverage remains elevated at 44.3%. s to deleverage through divestments. Suntec REIT’s all-in cost of debts has improved 9bp q-o-q to 2.35%.

Neutral Outlook for Office in 2022

• Suntec REIT's management expects the Singapore office portfolio to benefit the UK, 50% of employees have returned to work at the office since the lockdown ended in May. Leasing enquiries have improved for West End and City of London. Resiliency is underpinned by long WALE of 10.9 years and there is no lease expiry till 2027.

Creating Value Through Capital Recycling

• Suntec REIT has completed the acquisition of The Minster Building, a Grade-A 999-year distribution for past divestment gains of S$46m in 2H21.

Suntec REIT - Valuation & Recommendation

• We maintain our existing attractive discount of 22% to NAV per unit.

• Share price catalysts:
  • Positive rent reversion at Suntec City Office in 2021.
  • Employees returning to work at Suntec City Office and resumption of events at Suntec Convention to trigger a recovery in shopper traffic and tenant sales at Suntec City Mall.
  • Full-year contributions from 477 Collins Street and 21 Harris Street in Australia in 2021.

Source: UOB Kay Hian Research - 25 Oct 2021