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RHB upgrades Suntec REIT to ‘buy’ on strong operational metrics; analysts up TPs on forward estimates

Felicia Tan
Felicia Tan • 10 min read
RHB upgrades Suntec REIT to ‘buy’ on strong operational metrics; analysts up TPs on forward estimates
Suntec REIT reported a DPU of 7.135 cents for the FY2023 ended Dec 31, 2023, 19.7% lower y-o-y. Photo: Suntec REIT
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Analysts are largely remaining neutral on Suntec REIT’s prospects after the REIT reported a distribution per unit (DPU) of 7.135 cents for the FY2023 ended Dec 31, 2023, 19.7% lower y-o-y. The REIT’s DPU for the 2HFY2023 fell by 10.2% y-o-y to 3.659 cents while its 4QFY2023 DPU fell by 6.2% y-o-y to 1.866 cents.

RHB upgrades to ‘buy’ on strong operational performance

RHB Bank Singapore analyst Vijay Natarajan is the most upbeat in his assessment as he upgrades his call on Suntec REIT to “buy” from “neutral” previously as he expects the REIT’s operational strength to continue. He has also increased his target price estimate to $1.35 from $1.20, implying a 10% upside to the REIT’s unit price of $1.23 as at his report on Jan 25. Natarajan’s new target price also translates to a 5% yield.

“Suntec REIT’s 4QFY2023 results came in slightly better than expected, backed by strong Singapore operational performance,” he says. He also notes that the 19.7% y-o-y decline in the REIT’s FY2023 DPU was attributed to higher financing and operational costs, which offset the higher income from its Singapore assets. Suntec REIT’s financing costs, which rose by 90 basis points (bps) y-o-y to 3.84% in FY2023 is expected to peak at 4.1% in FY2024 and fall slightly in FY2025.

He adds: “Market concerns over valuation decline were unfounded as overall portfolio value rose 0.7% y-o-y, aided by Singapore assets which saw 3% valuation uplift mainly from income growth that more than offset the declines in Australia (-5%) and the UK (-10%)”. To be sure, the REIT’s Singapore portfolio continued to shine with healthy occupancy rates and strong positive rent reversions for the year.

“While office rents are expected to moderate, overall rent reversions are expected to be in the positive mid to high-single digits for FY2024. With regards to WeWork, it currently occupies three floors of office space at Suntec City office and has been current in payments so far while its space is seeing healthy utilisation levels ([around] 90%),” says Natarajan.

See also: UOBKH names Singtel as top pick in telco sector, CGSI raises TP to $3.30

“Australia office occupancy has been impacted by a key tenant exiting 55 Currie Street, but is expected to improve this year while UK assets are mainly on long-term leases,” he adds.

Overall, the analyst sees a moderation in the growth outlook for the REIT’s Singapore office and retail portfolio, although it is expected to remain positive. The worst is also likely to be over for the REIT’s overseas portfolio.

“The market’s main concerns over its low debt hedge position and high gearing should start to assuage with rates peaking. Attractive valuation of [over] 40% discount to book presents a good medium-term entry level,” he says.

See also: SGX's forward yield of 3.7% remains 'unexciting' says RHB; keeps 'neutral' call with TP of $10.40

The analyst has increased his DPU estimates for the FY2024 to FY2026 by 3% to 4% by lowering his interest cost estimates and adjusting rent growth. His cost of equity (COE) is also lowered by 20 bps as concerns on the REIT’s gearing are now mitigated.

Suntec REIT’s environmental, social and governance (ESG) score of 3.3 out of 4.0 is two notches above RHB’s country median. As such, a 4% ESG premium is applied to Natarajan’s target price.

PhillipCapital analyst Liu Miaomiao has kept her "buy" call on Suntec REIT with an unchanged target price of $1.47 as she sees the REIT's assets as "deeply discounted".

Suntec's FY2023 DPU exceeded Liu's estimates by 6.7%. The REIT's full-year gross revenue also surpassed her expectations while NPI stood in line.

In her view, the REIT's positives include its resilient balance sheet following the completion of its divestment goal, its higher valuation for its Singapore portfolio and better-than-expected recovery for Suntec Convention Centre. That said, a fading recovery story is a negative point, with the REIT's retail occupancy rate down by 2.3% y-o-y to 95.2% and portfolio occupancy for its offices segment down by 3.4% y-o-y to 94.9%.

"While Suntec REIT remains committed to its divestment plan, Australia will be considered as a last resort due to the widened valuation and transaction price gap, and muted investor appetite. The capital distribution is likely to remain unchanged, as Suntec REIT will only consider topping up distribution with divestment proceeds in the case of excess sales of strata units," notes Liu.

"There are no near-term plans for equity fundraising or acquisitions. Thus, the growth in FY2024 is hinged on organic means. Meanwhile, management is cautious about share buybacks due to potential tax implications," she adds.

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Meanwhile, the analyst remains positive for the Singapore office market due to a limited supply albeit muted macro-economic conditions.

"We anticipate mid-single digit rental reversion for FY2024 due to improved physical occupancy. Meanwhile, the overseas market may continue to experience intense competition in terms of leasing incentives due to a supply influx and muted demand," says Liu. "Despite potential further consolidation of retail footprints due to manpower constraints, and the inclination of locals to shop overseas due to a strong Singapore dollar (SGD), we still expect mid-teens rental reversion in FY2024, driven by footfall recovery."

Liu's DPU estimates for the FY2024 to FY2025 remain unchanged at 7.30 to 7.89 cents respectively.

‘Hold’ calls from CGS-CIMB, DBS, Maybank and OCBC

CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have kept their “hold” call on Suntec REIT as they see limited near-term DPU growth prospects.

During the FY2023, Suntec REIT’s DPU stood in line with the analysts’ estimates at 100% of their full-year forecast. “While Singapore office portfolio performance improved, higher financing costs, greater vacancies at its Australia and UK properties and weaker Australian dollar (AUD) impacted its bottomline,” they note.

With that, Lock and Ong have lowered their DPU estimates for the FY2024 by 4.59% and by 5.77% for the FY2025 on leasing downtime from higher vacancies in the REIT’s overseas properties. The analysts now expect Suntec REIT’s DPU to be at 6.6 cents for the FY2024 and 6.8 cents for the FY2025.

That said, the analysts have increased their target price estimate to $1.29 from $1.25 previously. The analysts’ new target price is due to rolled forward assumptions to FY2024.

DBS Group Research analysts Rachel Tan and Derek Tan have also kept their “hold” call as they remain cautious on interest rate adjustments and a drop in capital rate adjustments in FY2024. This is despite the REIT allaying investors’ biggest concern of asset valuation risks.

The analysts have, however, raised their target price to $1.15 from $1.10 as they roll their discounted cash flow (DCF) valuation forward.

“We believe its current FY2024 yield, at [less than] 6%, is lower than that of its peers,” say the DBS analysts.

“We continue to keep an eye on the re-rating catalysts, especially a turn in the interest rate cycle, as Suntec will be a key beneficiary of interest rate cuts due to its low hedging ratio,” they add.

In their report dated Jan 25, the analysts note key positives to the REIT such as its stable gearing and portfolio valuation, a steady recovery in Suntec Convention, as well as continued divestments of its strata offices to pare down its gearing.

Meanwhile, a backfilling of vacancy and a turn in the interest cycle are data points to watch.

Maybank Securities analyst Krishna Guha has kept his “hold” call on Suntec REIT as elevated gearing and operational weakness in the REIT’s overseas properties offset on the catalysts brought about by the visibility on capital top-ups.

In his Jan 24 report, the analyst notes that the REIT’s distributions remain under pressure. “Improved performance in Singapore was more than offset by higher borrowing costs, a weaker AUD and vacancies in overseas offices,” he writes. “With no visibility on top-ups, distribution from operations have downside risks.

After factoring in higher borrowing costs and an income vacuum in the REIT’s overseas offices, Guha has lowered his estimates by 2% to 3% with partial offset from the better performance seen in Singapore.

Guha’s target price estimate is raised to $1.20 from $1.15.

The research team at OCBC Investment Research (OIR) has also kept its “hold” call on Suntec REIT. The team expects the REIT to benefit from the region’s reopening, thereby providing a boost to its retail, convention and office segments.

However, the REIT’s convention business would need to see larger scale international events before a firmer recovery can happen. At the same time, its Singapore office portfolio could face some pressure on rental and occupancy rates despite the strong rental reversions seen in FY2023.

“There also continues to be uncertainties over the longer-term impact of work-from-home trends, although more employers appear to be encouraging their employees to return to office,” the team notes.

Other risks identified by the team are the impairments to the REIT’s office portfolio asset valuations in Australia and the UK due to the expansion in capitalisation rates.

Currency fluctuations, its relatively high aggregate leverage ratio and low interest rate coverage (ICR) ratio compared to its peers, along with the slower-than-expected momentum in the divestments of its assets are also concerns.

While Suntec REIT’s FY2023 DPU met the OIR team’s expectations at 101.9% of its full-year forecast, the team has lowered its FY2024 DPU forecast by 4.6% to 6.50 cents. Suntec REIT’s FY2023 DPU included 0.794 cents of capital distributions, which were paid out due to the previous divestment of a property. The team is not factoring in any further capital distributions in FY2024.

“While Suntec REIT’s operating metrics have remained firm, we remain cautious on its outlook as backfilling of vacant spaces will take time, while its gearing ratio remains elevated and its DPU growth in FY2024 will likely underperform peers in the absence of capital distributions,” says the OIR team.

In addition to its lowered FY2024 DPU forecast, the team has also reduced its COE assumption from 7.7% to 7.6% as we apply a lower risk free rate assumption. It has also made a “minor tweak” to its beta input.

As a result, its fair value estimate is raised to $1.12 from $1.06 previously.

On the ESG front, Suntec REIT’s rating was downgraded by OIR in November 2023 due to weakness in the REIT’s staff management efforts compared to its peers.

“To elaborate, Suntec REIT appears to lack best practices such as annual employee satisfaction surveys and apprenticeship programmes to address potential recruitment and retention challenges. Although Suntec REIT has an independent board majority, there is absence of a fully independent pay committee and there is limited executive pay disclosures,” says the team. “However, its business ethics framework which includes board level oversight and whistleblower protection provisions are ahead of most its global peers.”

On the “E” pillar of ESG, 100% of Suntec REIT’s portfolio (by number of buildings) are certified to green building standards as of FY2022, which is much higher as compared to the industry average of 29% as of May 2023, the team adds.

Citi keeps 'sell' call

Citi Research analyst Brandon Lee has kept his “sell” call with an unchanged target price of $1.13 even though Suntec REIT’s asset valuations remained “surprisingly resilient”. He has retained his “sell” call due to the REIT’s valuations.

“We see a slightly positive share price impact on flattish gearing and sale of Suntec City office strata units,” he writes in his flash note dated Jan 24.

In a separate report on the same day, Lee notes that the REIT’s manager has a healthy operational outlook for its retail and convention businesses in FY2024. He adds: “Dividend contributions from Suntec Convention should be higher (started contributing $3.9 million in 2HFY2023) going forward in FY2024, due to stronger/earlier-than-expected recovery in FY2023, maiden events and delay in Marina Bay Sands’ (MBS) expansion.”

Units in Suntec REIT closed 2 cents lower or 1.63% down at $1.21 on Jan 25.

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