Singapore (Jan 3): 2019 had not been kind to Suntec Real Estate Investment Trust (Suntec REIT). But RHB Group Research believes 2020 could well be a turnaround year for the REIT.

Last year, the counter climbed just 4%, compared to a 19% rise in the FTSE ST Real Estate Investment Trusts Index over the same period, as distribution per unit (DPU) fell 3.2% y-o-y in 9MFY2019 ended September.

“Suntec REIT was a laggard in 2019 – we believe the market was focusing on headline DPU fall, instead of operational income growth,” says RHB analyst Vijay Natarajan in a report on Friday.

RHB has a “buy” call on Suntec REIT with a target price of $2.08. This represents a potential upside of 12.4% from its closing price of $1.85 on Jan 2.

Natarajan notes that Suntec REIT trades at an “attractive valuation” of just 0.86 times price-to-book value (P/BV), compares to the 1 times P/BV of its office REITs peers.

In light of the organic earnings growth and attractive valuation, RHB is ranking Suntec REIT as its top pick in the commercial REIT sector.

“Suntec REIT’s office portfolio rents have been on an uptrend, with six consecutive quarters of positive rental reversions, which should contribute positively to earnings,” Natarajan says.

The analyst notes that some 14% of Suntec REIT’s office leases by net lettable area (NLA) are up for renewal in 2020. “With expiring rent in the low $8 per square foot level vs passing rent of $9-10 psf, we expect strong double-digit rent growth from its office portfolio,” he adds.

Meanwhile, Natarajan points out that Suntec REITs assets under development – 9 Penang Road (9PR), Olderfleet, and 21 Harris Street (21HS) – are scheduled for completion by 1H20. And their income contribution will be a welcome addition.

“A key drag on Suntec REIT’s earnings has been upfront development costs for assets currently under development without income contribution,” Natarajan says. “Overall, these three assets are expected to contribute close to $30 million in net income for 2020F, or close to 8% of overall (including joint venture contributions).”

The way Natarajan sees it, Suntec REIT has risen above market challenges due to active efforts by the management.

“Despite the challenging retail climate, Suntec City has seen an improved operational performance – driven by higher tenant sales and increased footfall,” Natarajan says. “The mall has been registering positive rent reversions for nine consecutive quarters, and we expect this to continue in 2020 – with mid-single digit rental growth.”

As at 1pm, units in Suntec REIT are trading 1 cent lower at $1.84. According to RHB valuations, this implies an estimated P/BV of 0.86 times and a dividend yield of 5.3% for FY20F.