• Downgrade to NEUTRAL from Buy, with new TP of SGD1.47 from SGD1.70, 7% upside. We expect Suntec REIT’s office portfolio to be impacted by the technology sector’s slowdown – moderating rent growth with a slight uptick in vacancy. This, coupled with the sharp interest cost impact from a spike in rates, should weigh on its share price. Divestments are anticipated in the near term to lower gearing and manage interest cost pressures. While valuation is inexpensive (c.35% discount to book value), we see limited catalysts ahead.

• Office demand drivers slowing down. The technology, media and telecommunications (TMT) sector is the largest occupier of Suntec City Office Towers (c.38% of FY21 rents) and has also been the key source of new leasing demand in recent years. Suntec City Office Towers is the largest asset in its portfolio (c.30% of income) and currently has a high committed occupancy of 99.6% and rent reversion (YTD) of 3.3% as at 3Q. For FY23F, c.27% of leases are due for renewal and we expect committed occupancy could fall to c.98% levels with flattish rent reversions. Other 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. Suntec City Mall’s performance should remain relatively steady while the convention segment is expected to rebound strongly in FY23.

• Divestments likely in FY23. SUN’s gearing of 43.1% is on the high side vs peers and has been one of the key investor concerns. 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. We also see potential for it to divest assets in Australia or pare down its stake in Singapore to lower debt. SUN has one of the lowest hedged debt profile (58%), with every 50bps rise in rates impacting distributable income by c.5%

• Overseas portfolio mitigated by long leases. The impact of the weaker UK economic outlook on its office assets (c.12% of income) is mitigated by its long lease profile with no significant lease expiries/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 FX front, it has hedged 61% of its overseas derived income, thereby limiting FX impact.

• We lower FY23F-24F DPU by 12% by adjusting occupancy and rental growth, higher financing costs and assuming higher fees in cash (50% vs 30%). ESG score of 3.1 out of 4.0 is a notch above the country’s median. Thus we apply a 2% premium to our DDM-derived TP.

Source: RHB Research - 10 Jan 2023