• Keep BUY, 13% upside plus 5% yield.
• SUNTEC REIT (SGX:T82U) is our commercial REIT Top Pick on attractive valuation and organic earnings growth. Key catalysts are healthy positive rent reversion from key asset, Suntec City, and earnings contributions from three development assets.
• Suntec REIT was a laggard in 2019 – we believe the market was focusing on headline DPU fall, instead of operational income growth. Valuation remains attractive as it trades at 0.86x P/BV (vs office REITs’ 1x).

Expecting High Single-digit Rent Reversions for Suntec City Offices

• 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.
• Looking ahead, 14% of office leases by NLA are up for renewal in 2020. With expiring rent in the low SGD8 psf level vs passing rent of SGD9-10 psf, we expect strong double-digit rent growth from its office portfolio.

Exposure to Co-working Sector Is Minimal

• Exposure to co-working sector is minimal at 2% of the total. While co-working, which has been a key driver of office demand over the last few years, is expected to see a considerable slowdown, we believe demand from the technology, media, and telecommunication sectors will continue to hold up, keeping office portfolio occupancy at high 90% levels.

Three Development Assets to be Completed by 1H20

• A key drag on Suntec REIT’s earnings has been upfront development costs for assets currently under development without income contribution. The assets, which have yet to start contributions are 9 Penang Road (9PR), Olderfleet, and 21 Harris Street (21HS), and are slated for completion by 1H20.
• In terms of pre-commitments, 9PR has been 100% pre-committed to UBS on a long lease, while Olderfleet has secured commitments for 87% of its space, with additional heads of agreement signed for 5%. 21HS, which was acquired recently, is currently 65% pre-committed and comes with a 3-year rent guarantee for the remaining spaces.
• Overall, these three assets are expected to contribute SGD30m in net income for 2020F, or 8% of overall (including JV contributions).

Retail and Conventions: Rising Above Market Challenges

• Despite the challenging retail climate, Suntec City has seen an improved operational performance – driven by higher tenant sales and increased footfall. We believe this is mainly being driven by management’s active efforts. 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.
• Meanwhile, the Suntec Singapore Convention & Exhibition Centre should also benefit from the strong pipeline of corporate events lined up for 2020.

Key Risks and Earnings Revisions

• Risks include a sharp slowdown in the economy that would result in a pullback in office demand and reversal of fund flows from the REIT sector. We also fine-tune our FY20F-21F DPU by 0-1%.

Source: RHB Invest Research - 3 Jan 2020