DBS: Suntec REIT – Hold Target Price $1.15

Asset value risks allayed

• FY23 DPU -20% y-o-y to 7.14 Scts, slightly higher than our estimates, impacted by higher interest cost 
• Key positives: i) Gearing remained stable; ii) portfolio valuation stable; iii) Suntec Convention recovering steadily; iv) continuing strata office divestments to pare down gearing 
• Data to watch: i) Backfilling of vacancy; ii) a turn in interest rate cycle 
• Maintain HOLD; raise TP to S$1.15   

Gearing held stable at 42%, as portfolio valuation held up better than expected; Suntec Convention continues to recover. 

• Suntec’s FY23 DPU -20% y-o-y to 7.14 Scts, slightly above our estimates. 
• 4Q23 core DPU -6.2% y-o-y (+4% q-o-q) to 1.67 Scts. 
• The portfolio’s performance was generally held up by Singapore assets but was impacted by higher interest costs and some higher expenses. 
• 2H23 revenue grew 7% y-o-y but EBIT fell 5% y-o-y, partially due to higher costs and some vacancies, especially within the overseas portfolio. H-o-h, EBIT has improved 4%.   
• Gearing held relatively stable at 42.4% (vs. 42.7% in 3Q23), as its portfolio valuation (+0.7% y-o-y) held up better than expected. 
• Debt ratio (D+P)/A remains relatively stable h-o-h at 41%. 
• ICR ratio held stable q-o-q at 2.0x (bank covenants were lowered to 1.75x). EBIT/EBITDA ICR has been on a downward trend to 1.3x in 2H23 (1.4x in 1H23 and 1.6x in 2H22). We believe this ratio could improve when the interest rate cycle turns.  
• The portfolio’s valuation was held up by Singapore assets (+3.1% y-o-y, cap rates remain stable, except Suntec Convention -25bps). Australia saw a -4.5% decline (cap rates expanded 50-60bps) and UK a -10.2% decline (cap rates expanded c.60bps). 
• Portfolio occupancy declined marginally to 95.7%, vs. 98.1% in 3Q23, mainly from Australia (-6.8 ppt q-o-q to 88.6%, as the anchor tenant left 55 Currie St), and Singapore retail (-3ppt q-o-q to 95.6%, mainly from the departure of Pure Yoga and Pure Fitness at Suntec City Mall). 
• The office portfolio continues to deliver strong double-digit positive reversions, both in Singapore (+13% in 4Q23) and Australia (12.8% in 2H23). 
• Similarly, Suntec City Office and Suntec City Mall delivered strong positive reversions of 12% and 26% in 4Q23, respectively. 
• FY23 tenant sales are +4% y-o-y (14% above pre-COVID). 4Q23 tenant sales psf at Suntec City Mall are estimated to be flat y-o-y. 
• Suntec Convention delivered a strong recovery. 2H23 revenue and NPI grew c.40% y-o-y.  

Key takeaways from results briefing

• Despite the cautious macroeconomic outlook, Suntec expects its Singapore assets will be able to deliver positive rental reversions. Singapore office is expected to deliver 5% to a high single digit in positive reversions while Singapore retail would be between 10% to 15%. 
• Management believes that Singapore office will remain resilient despite some upcoming supply from the completion of IOI Central Boulevard. Tenants continue to prefer renewing their existing space over moving to new office locations due to the higher cost of moving. As such, management is confident that occupancy will remain high. 
• Suntec believes there is still upside for Singapore retail, as i) tourist spending is still below pre-COVID and ii) return-to-office at Suntec Office is at 50%, with room to increase. However, residents travelling and spending overseas following the strengthening of the SGD could offset some of the upside. 
• Gross turnover rent has increased to 7% vs. 3% during pre-COVID, and management expects this trend to continue. 
• Occupancy cost is c.21% vs. 23% pre-COVID. 
• Backfilling of vacancy: i) Suntec City Mall – looking to backfill Pure Yoga space with two F&B tenants and targets to backfill the remaining one-third of the vacancy (Pure Fitness space) with an entertainment section, so expect some downtime; ii) 55 Currie Street – there are some pending HOAs but backfilling is still slow, so expect a downtime of c.12 months; and iii) Minster building – currently in talks with two prospective tenants.  
• On the strata office sale, Suntec had divested S$94.4m vs. its target of S$100m at 31% above book value in FY23. In FY24, Suntec continues with its strata office sale strategy (a guide of S$100m) to lower its gearing.  
• Management still prefers divestments over pre-emptive equity fundraising and is hopeful to divest some Australia assets should the transaction market in Australia recover. 
• Management expects FY24 financing costs could still trend up slightly to 4.2%, given the expiry of some interest rate swaps that were entered into during a very low interest rate period. 
• As a rough guidance on sensitivity, management expects a 50bps interest savings with an interest rate cut of 150bps. 
• Suntec has completed its capital distributions from previous divestments in FY2023. Following the strata office divestment, the capital gains is more than S$20m currently. Management will likely retain capital gains in a high interest rate environment but will review and decide progressively, depending on further divestments. 

Maintain HOLD rating; raise TP to S$1.15. Watch out for a turn in interest rate cycle, as Suntec will be a key beneficiary of interest rate cuts. We maintain our HOLD rating but raise our TP to S$1.15 from S$1.10 previously, as we roll forward our DCF valuation. Suntec currently trades at a 5.2% FY24F yield and 0.6x P/NAV. Compared to peers, its yield is on the lower end. 

Suntec has allayed one of the biggest concerns among investors by having successfully kept gearing stable at 42%. This will likely boost investor confidence. However, the interest rate adjustments in FY24 from refinancing and the expiries of hedges will likely still cause some impact, though it will be small y-o-y. On operations, Singapore assets will continue to hold up its portfolio’s performance despite the cautious outlook in both office and retail. Australia office continues to be challenging, with AEIs to support tenant retention. 

We continue to keep an eye on potential re-rating catalysts, especially a turn in interest rates, as Suntec will be a key beneficiary of potential interest rate cuts, as its hedging ratio remains low, at c.60%.