• Keep BUY and SGD1.35 TP, 10% upside and c.5% yield. Suntec REIT’s 3Q financials were in line. Key positives for 3Q include continued strong double- digit rent reversion for its office and retail portfolios and higher Suntec City mall occupancy. Overseas assets operational performance has bottomed with occupancy improvements anticipated, but management expects valuation to decline from Australia due to higher cap rates. Financing costs are expected to be higher in FY25 due to the expiration of hedges. Valuation is reasonable at 0.6x P/BV, with divestments being the key catalyst.

• Divestments mainly from Suntec City’s strata office, with a SGD100m target for FY24 – it has currently achieved 50%. Market conditions remains unfavourable for potential divestments in Australia with management citing a high bid-ask spread. Gearing is stable at 42.3% while some valuation losses are expected for its Australian assets – a higher value for its Singapore and UK assets will offset this, in our view, with gearing at manageable levels (~42%) at the end of the year.

• Strong double-digit rent reversions from office and retail portfolios. Rent reversion (3Q) for Singapore office portfolio stood at +12.9% (2Q: 7.9%), marking 25 consecutive quarters of positive reversion. Guidance remains positive in the mid- to high-single digit for FY25. Suntec City Mall’s rent reversions remain robust at +21.2% with occupancy improving to 98.4%. Retail rent reversion guidance for FY25 also remains positive at 10-15%.

• UK assets on track to achieve full occupancy, with an existing insurance tenant expanding at The Minster Building, taking it to 100% occupancy from the current 91.3%. The sizeable lease breaks (c.8%) due next year have also been removed, resulting in minimal expiries for its UK assets until 2028. Committed occupancy for its Australian portfolio improved 1.5ppts QoQ to 90.6%, driven by 55 Currie Street where further improvements in occupancy are expected in the coming quarters. Rent reversions (YTD) remain healthy at +13.3% although this is offset by high prevailing tenant incentives.

• Flat 3Q distributable income and slight 1% YoY decline in operational DPU. NPI (3Q) rose from Singapore office and retail assets, offset by lower overseas income. Convention segment NPI declined 30% YoY due to the absence of large-scale events with management guiding for a flattish full year performance. Overall financing cost rose slightly by 4bps QoQ to 4.06%. For FY25, Suntec REIT expects financing cost to increase to 4.2-4.3% range due to the expiration of some of its fixed rate hedges.

• No changes to estimates. The REIT continues to make good progress on ESG metrics and goals. Its ESG score of 3.3 results in a 4% ESG premium.

Source: RHB Research - 28 Oct 2024