• Still NEUTRAL, lower SGD1.40 TP from SGD1.47, 6% upside. 1H23 results were below expectations due to higher-than-expected operating and interest costs. Operational performance continued to demonstrate resilience with high occupancy rates and healthy rent reversions, but these are expected to moderate in the coming quarters. While Suntec REIT remains undervalued at a c.40% discount to book value, we see limited catalysts – barring an earlier-than-expected peak in interest rates.

• 1H operational DPU down 30% YoY due to higher financing costs, FX impact, and higher operating expenses. The REIT continued with a capital top-up of SGD11.5m for 1H, and has a SGD11.5m balance top-up from past gains, which is expected to be distributed in 2H. Revenue growth (+10% YoY) was dragged down by a 54% increase in net finance costs, which are expected to increase further in 2H and remain elevated next year. Property expenses rose 40% mainly from the increase of management corporation strata title (MCST) contributions for Suntec City. While no revaluations were done in 1H, based on its peer Keppel REIT’s (KREIT SP, BUY, TP: SGD1.08) results and the REIT manager’s guidance, overall valuations are expected to remain stable and unlikely to see a large decline of >3%.

• Evaluating more divestment options. SUN announced the divestment of three strata units at Suntec Office towers, which based on our estimates, works out to c.SGD30m in proceeds (c.20% above its carrying value). The REIT is exploring the possibility of divesting more Suntec strata office assets, including complete floors, to lower its gearing to 40% (from 42.6% currently). While divestment options are being evaluated for its Australian assets market, conditions remain challenging with limited buyers. SUN has also successfully negotiated with its lenders to lower the interest cover ratio on its loan covenants, giving it more flexibility in case of a prolonged high interest rate environment.

• Operational metrics remain strong, but nearing peak levels. Singapore committed office occupancy rose 0.4ppts QoQ to 99.3% with healthy 1H23 rent reversion of 10.8%. Australian office occupancy declined slightly by 0.7ppts QoQ to 96.6% and is likely to weaken further in 2H23. Singapore retail portfolio occupancy remains stable at 98.2% with Suntec City mall registering a strong +17.5% rent reversion in 1H23. Convention portfolio continues to see a strong recovery, with a full recovery expected in 2024.

• We cut FY23-24F DPU by 6% and 7% by adjusting our operating cost and interest cost assumptions higher. SUN’s ESG score is raised to 3.2 based on our recently revised scoring methodology, which has higher weightage on the environmental metric. Our ESG premium is therefore raised to 4% (from 2%) to our DDM derived TP, based on an ESG score of 3.2.

Source: RHB Research - 26 Jul 2023