Date of Report and Broker Name
- Date: 20 September 2024
- Broker: OCBC Investment Research
Company Overview
Suntec REIT, listed on 9 December 2004, holds a diversified portfolio of high-quality properties in Singapore, Australia, and the UK. Its assets include:
- Properties in Suntec City, Singapore’s largest integrated commercial development, including one of Singapore’s largest shopping malls.
- A 66.3% interest in Suntec Singapore Convention & Exhibition Centre.
- A one-third interest in One Raffles Quay and Marina Bay Financial Centre Towers 1 and 2, including Marina Bay Link Mall.
- 100% interest in commercial properties across Australia: 177 Pacific Highway (Sydney), 21 Harris Street (Sydney), and 55 Currie Street (Adelaide).
- A 50% interest in Southgate Complex (Melbourne), and a 50% interest in Olderfleet at 477 Collins Street (Melbourne).
- 50% interest in Nova Properties and 100% interest in The Minster Building, both located in London, UK.
Suntec REIT is managed by ARA Trust Management (Suntec) Limited, focusing on sustainable management, corporate governance, and prudent financial practices.
Recent Share Performance and Market Outlook
As of 19 September 2024, Suntec REIT’s share price has rallied 16.1% since 31 July 2024, outperforming the FTSE ST All-Share REIT Index (FSTREI), which rose by 9.8%. This outperformance is driven by market anticipation of a potential Federal Reserve (Fed) rate cut. However, OCBC notes that future rate cuts might not significantly ease the REIT’s borrowing costs due to the expiration of low-cost interest rate hedges in FY25. Therefore, Suntec REIT’s financing costs are projected to see only slight reductions in FY25.
Despite recent positive momentum, OCBC has downgraded Suntec REIT’s rating to ‘Sell,’ citing concerns over its operational performance and market fundamentals not supporting the stock’s current valuation.
Operational Performance
Suntec REIT’s operations in Singapore continue to demonstrate good traction, with strong rental reversions for both its retail and office portfolios. Additionally, the convention business has recovered faster than expected. However, there are concerns about the sustainability of these gains. Key operational challenges include:
- Singapore Office Market: Rental reversions are expected to moderate, particularly for its Suntec City Office properties, where FY25 expiring rents of SGD 10.05 per square foot per month are higher than FY24’s expiring rents of SGD 9.47.
- Retail and Convention Operations: While resilient, the retail sector may see only moderate growth, and uncertainties persist in the convention business despite its recovery.
- Overseas Operations: In Australia and the UK, Suntec REIT’s office portfolio has been impacted by impairments due to rising capitalisation rates and occupancy pressures.
Investment Risks
Suntec REIT faces several key risks, including:
- High Leverage and Low Interest Coverage: Suntec REIT has a relatively high aggregate leverage ratio and a lower interest coverage ratio (ICR) compared to peers.
- Macroeconomic Conditions: A slowdown in macroeconomic conditions could negatively impact both consumer sentiment and business activities, affecting tenant renewals and rental income.
- Rising Interest Rates: Any rise in interest rates could increase borrowing costs, adding financial strain.
- Work-From-Home Trends: While more employers are encouraging staff to return to offices, the long-term impact of work-from-home policies remains uncertain, which could affect office space demand.
- Currency Fluctuations: As Suntec REIT holds overseas assets, foreign currency fluctuations may pose additional risks to its performance.
ESG Considerations
Suntec REIT’s ESG rating was downgraded in November 2023 due to weak staff management compared to peers. Key concerns include the absence of employee satisfaction surveys and apprenticeship programs. Additionally, Suntec lacks a fully independent pay committee and has limited executive pay disclosures. However, its business ethics framework, which includes board-level oversight and whistleblower protection, ranks above global peers.
On the environmental front, Suntec REIT performs well, with 100% of its buildings certified to green building standards as of FY22, a significant achievement compared to the industry average of 29%.
Financial Projections and Valuation
- Gross Revenue: Projected to rise from SGD 462.7 million in FY23 to SGD 485.1 million in FY25.
- Net Property Income: Estimated to increase from SGD 313.2 million in FY23 to SGD 326.4 million in FY25.
- Distribution Per Unit (DPU): Expected to decline from 7.14 Singapore cents in FY23 to 6.61 cents in FY25.
- Valuation: Suntec REIT’s fair value estimate was raised slightly from SGD 1.15 to SGD 1.19, primarily due to a lower risk-free rate assumption of 2.50%. However, the stock is trading at FY24 and FY25 distribution yields of 4.5% and 4.8%, which are lower than its historical average of 5.7%.
Conclusion
Although Suntec REIT has shown recent share price outperformance, it faces significant operational challenges and macroeconomic uncertainties. With a downgrade to ‘Sell,’ investors should be cautious, as further improvements in operational performance are necessary to justify the current valuation. Additionally, the anticipated rate cut cycle may not provide immediate financial relief due to Suntec REIT’s high leverage and expiring low-cost interest rate hedges.
Source:
2024-09-20, OCBC Investment Research, “Suntec REIT – Company Update”
