RHB Group Research analyst Vijay Natarajan has downgraded Suntec REIT to “neutral” from “buy” with a lower target price of $1.47, down from $1.70 previously.

The downgrade comes as the analyst foresees Suntec REIT’s office portfolio being impacted by the slowdown in the technology sector. The slowdown is likely to see a moderation in rent growth with a slight uptick in vacancy, notes Natarajan.

“This, coupled with the sharp interest cost impact from a spike in rates, should weigh on its share price,” he adds.

The technology, media and telecommunications (TMT) sector is the biggest occupier of Suntec City Office Towers, making up around 38% of building’s rents in the FY2021 period ended December 2021. The sector has also been the key source of new leasing demand over the years, the analyst points out.

Suntec City Office Towers itself is the largest asset in the REIT’s portfolio, contributing around 30% to its total income. It currently has a high occupancy rate of 99.6% and rent reversion of 3.3% as at the 3QFY2023.

“For FY2023, [around] 27% of leases are due for renewal and we expect committed occupancy could fall to [around] 98% levels with flattish rent reversions,” says Natarajan.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/s-reits-not-yet-vogue-dbs-continues-favour-industrial-and-retail-subsectors?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>S-REITs not yet in vogue, DBS continues to favour industrial and retail subsectors</a>

“Other joint venture (JV) Singapore office assets in its portfolio (One Raffles Quay, Marina Bay Financial Centre) are predominantly focused on the financial and insurance sectors’ tenants and likely to be less impacted,” he adds. “Suntec City Mall’s performance should remain relatively steady while the convention segment is expected to rebound strongly in FY2023.”

In Natarajan’s view, divestments are also anticipated in the near-term and are likely to happen in the FY2023 to lower debt. This is with Suntec REIT’s gearing on the high side at 43.1%, compared to its peers. The REIT’s high gearing has also been one of the key investor concerns, he notes.

“While the cap rate expansion is expected to have a negative impact on the value of its overseas assets (UK in particular), we expect this to be partially offset by its Singapore assets, which have seen strong operational improvements. Thus we do not expect any significant reduction in portfolio value during its year-end valuation, with gearing to be maintained below the 45% level,” he writes.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-lifts-comfortdelgros-tp-161-upon-seeing-improving-rail-and-taxi?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian lifts ComfortDelGro’s TP to $1.61 upon seeing improving rail and taxi ridership</a>

“We also see potential for it to divest assets in Australia or pare down its stake in Singapore to lower debt. Suntec REIT has one of the lowest hedged debt profile (58%), with every 50 basis point (bps) rise in rates impacting distributable income by [around] 5%,” he adds.

One bright spot for the REIT is its long leases for its overseas portfolio. The REIT’s long lease profile for its UK portfolio will mitigate the impact of the weaker economic outlook on the country’s office assets. The REIT’s UK portfolio has no significant lease expiries and, or breaks until 2025.

Similarly, for its Australian assets, the REIT has already secured lease commitments for more than half of 2023 expiring lease. On the foreign exchange (forex) front, it has hedged 61% of its overseas-derived income, thereby limiting forex impact, says Natarajan.

In addition to his lowered target price estimate, the analyst has reduced his distribution per unit (DPU) estimates for the FY2023 to FY2024 by 12%. This is after adjusting occupancy and rental growth, higher financing costs and assuming higher fees in cash (50% vs 30%).

The new target price includes a 2% premium thanks to the REIT’s slightly higher-than-average environmental, social and governance (ESG) score of 3.1 out of 4.0.

As at 9.49am, units in Suntec REIT are trading 1 cent lower or 0.73% down at $1.36.

RHB downgrades Suntec REIT to 'neutral' with lower TP of $1.47

Temasek's GenZero invests in At One Ventures' US$375 mil Fund II backing 'disruptive climate tech'

Total value of assets seized in money laundering case now more than $2.8 billion

VTAC proposes business combination with live streaming platform 17LIVE

Data is the new oil but is it as dirty?

'Transition credits' could sweeten deal for early retirement of coal-fired power plants: MAS, McKinsey paper

Trade Stocks, ETFs, Forex and Futures with Phillip Nova:

RHB downgrades Suntec REIT to 'neutral' with lower TP of $1.47

Related News

Highlights

Temasek's GenZero invests in At One Ventures' US$375 mil Fund II backing 'disruptive climate tech'

Related News

RHB ‘upbeat’ on Raffles Medical’s contract win for providing medical services at Connect@Changi

Redevelopment of Marina Square ‘decent RNAV accretion’ of 4% to 6% for UOL, says Citi

Citi lowers Parkway Life REIT’s TP to $3.85 due to higher portfolio cap rate and higher discount rate