RHB calls Suntec REIT a ‘buy’ on better 2H

RHB Securities analyst Vijay Natarajan is maintaining his “buy” call on Suntec REIT with an unchanged target price of $1.78, on the back of expected improvement in organic income from 2H2020 due to the REIT’s newly completed developments, as well as an attractive valuation.

“Suntec REIT remains our preferred office/retail pick on valuation grounds and expected improvement in operational numbers,” said Natarajan in a July 1 report.

The REIT currently has a capital gain balance of $46 million with an expected yield of 6%, and is trading at an “attractive valuation” of 0.66 times price-to-book value (P/B), which is a 17% discount compared to its sector peers.

In addition, one of its major shareholders, the family of Gordon Tang, increased its stake to 8% through open-market purchases in May.

Natarajan notes that the REIT manager, a wholly-owned subsidiary of ARA Asset Management, has a proven ability to grow “by leveraging ARA’s network and track record” over the years.

He notes that Suntec REIT’s management provided two months’ rental rebates for retail tenants in April and May. With this, coupled with support from the government, tenants will receive four months in rebates, plus cash flow assistance by drawing on security deposits.

“We don’t expect any significant impact from mandatory one- month base rent relief for qualifying SME tenants under the new framework,” he says.

Most tenants will weather the storm, as less than 1% of tenants are expected to terminate their leases prematurely. Nevertheless, management anticipates headwinds for Suntec City mall, with occupancy levels “expected to trend to [a] low [of] 90% from a current high [of] 98% on potential non-renewals”.

To reduce operating costs, the Suntec Singapore Convention and Exhibition Centre will remain closed until Aug 2.

On the other hand, Suntec REIT’s office portfolio, which contributes 70% of the income, is seen as remaining resilient. Occupancy in 1Q2020 was maintained at 98.8% and only 8.6% of leases are pending renewal this year.

Suntec REIT leased 133,900 sq ft of office space in 1Q2020, of which 42% are new leases. This coming FY2021, some 29% of its office leases will be up for renewal and the tenants are now paying between 10% and 20% below market rates in 1Q2020. “Rent reversions in 1Q were healthy at 13% and management expects this trend to continue,” notes Natarajan.

Apart from its eponymous spaces, Suntec REIT expects higher income in 2H2020 from its new development project in 9 Penang Road, of which it has a stake of about 30%, as well as from its Australian projects — Olderfleet in Melbourne and 21 Harris Street in Sydney.

Natarajan has trimmed Suntec REIT’s distribution per unit (DPU) by 8% to 7.8 cents for FY2020 by mainly removing capital top-ups assumed. He has also increased the REIT’s FY20212022 DPU by 1-2%. — Jovi Ho