• While Suntec REIT (SGX:T82U)’s convention and retail segments face near-term challenges due to the COVID-19 pandemic, the office segment is expected to remain relatively resilient due to a minimal lease expiry and low average expiring rents (vs committed rents).
• Suntec REIT's balance sheet remains relatively healthy and the completion of development assets is largely on track. Valuations are starting to look attractive at 0.6x P/BV.

The Retail and Convention Segments Account for One Third of Income

• Retail segment accounted for 27% of 4Q19 net property income (NPI). In terms of tenant assistance package, Suntec REIT has currently rolled out up to 2.75 months relief to their cash flow: It released one month of security deposits, 1 month of rental rebates from pass-through of property tax rebates and the remaining 0.75 months will be from the REIT. ( However, the Suntec Convention Centre (6% of NPI) will be the worst hit with upcoming events cancelled or postponed.

Risks for the Office Segment Are Relatively Mitigated

• Only 13% of office leases is due for renewal in 2020. While office leasing is likely to see a pause amid the current uncertain conditions, the expiring rents for FY20 (SGD 8.9psf pm) were still 15% lower than the market rents before the pandemic thus providing some cushion to lower the rent for new lease signings.
• There is also a possibility of deferring the sinking fund contribution (SGD 19.3m in 2019) which was used for upgrading Suntec City thus saving additional operating overheads for the REIT in the near-term.

No Major Delays in the Completion of Its Asset Developments

• 9 Penang Road (a 30% stake) has obtained its temporary occupation permit in Oct 2019. The office component has been 100% pre-leased to UBS (long lease tenure) with targeted occupation (rental commencement) in 2H20.
• Management noted that completion of its Australian assets Olderfleet and 21 Harris Street is largely on track with only a few days of delay expected. The assets are > 80% pre-committed with long underlying weighted average lease to expiry (WALE) thus mitigating effects from near-term volatility.

Earnings and Target Price Changes

• We revised our FY20-22F DPU lower by 8- 13% factoring in rent rebates, lower rent growth and occupancy. We have also increased our COE assumptions by 30bps. Valuations are starting to look attractive at 0.6x P/BV. Keep BUY with a lower target price of $1.78.

Balance Sheet Remains Strong With No Debt Maturing Until 2021

• Gearing stands at 37.7% and for it to breach 45% gearing threshold asset values would have to decline by >16%. Suntec REIT has already refinanced a SGD310m medium term note maturing this year. About 75% of its borrowing is fixed in nature.
• Suntec REIT also hedged 30% of AUD-denominated income for 2020 on top of a natural hedge from AUD borrowings.

Source: RHB Invest Research - 3 Apr 2020