• Upgrade to BUY from Neutral, with new SGD1.35 TP from SGD1.20, 10% upside and c.5% yield. Suntec REIT’s 4Q23 results came in slightly better than expected, backed by strong Singapore operational performance. Growth outlook for Singapore office and retail portfolio is expected to moderate but remains positive, while the worst is likely over for its overseas portfolio. The market’s main concerns over its low debt hedge position and high gearing should start to assuage with rates peaking. Attractive valuation of >40% discount to book presents a good medium-term entry level.

• FY23 DPU declined 20% YoY as higher income from Singapore assets was offset by higher financing and operational costs as well as weaker overseas performance. Final DPU includes a capital top-up of SGD23m from past divestment gains from Park Mall, and with the entire amount now distributed, no capital top-up is expected in FY24F. Market concerns over valuation decline were unfounded as overall portfolio value rose 0.7% YoY, aided by Singapore assets which saw 3% valuation uplift mainly from income growth that more than offset the declines in Australia (-5%) and the UK (-10%). Financing costs rose 90bps YoY to 3.84% in FY23 and we expect this to peak this year at c.4.1% in FY24F and fall slightly in FY25F.

• Singapore office portfolio continued to shine, with healthy 99.7% occupancy (+0.2ppt QoQ) and strong positive rent reversions of 12.3% for FY23. While office rents are expected to moderate, overall rent reversions are expected to be in the positive mid to high-single digits for FY24. With regards to WeWork, it currently occupies three floors of office space at Suntec City office and has been current in payments so far while its space is seeing healthy utilisation levels (~90%). Australia office occupancy has been impacted by a key tenant exiting 55 Currie Street, but is expected to improve this year while UK assets are mainly on long-term leases.

• Suntec City Mall saw strong rent reversion of +21.8% (FY23), indicating healthy recovery post COVID-19 and good leasing efforts by better repositioning the mall to various trade categories. Rent reversion (FY24) is expected to remain strong at 10-15%, based on management guidance. However, occupancy fell 3.1ppts QoQ to 95.6% mainly due to the exit of Pure Fitness and Pure Yoga. Management expects to reposition the space for the F&B and entertainment sectors and targets to achieve healthy positive rent reversions on it. Convention segment revenue (FY23) too has exceeded pre COVID-19 levels, with a stronger FY24 on cards.

• We have revised up our FY24F-26F DPU by 3-4% by fine tuning our interest costs lower and adjusting rent growth. Our cost of equity is also adjusted lower by 20bps with concerns on gearing now mitigated. The REIT’s ESG score of 3.3 (out of 4.0) is two notches above our country median, so we apply a 4% ESG premium to our DDM-derived TP.

Source: RHB Research - 25 Jan 2024