Date of Report: October 29, 2024
Broker: Maybank Research Pte Ltd
Overview of Suntec REIT
Suntec REIT (SUN SP) is a real estate investment trust with a diversified portfolio focused on income-producing office and retail properties. Its assets span Singapore and Australia, with notable properties including Suntec City, comprising office towers, a mall, and a convention center. The REIT is managed by ESR, the largest REIT manager in the Asia-Pacific region, boasting assets under management (AUM) of USD 45 billion across 14 REITs and logistics assets.
Financial Performance and Distribution
9M24 Distribution Per Unit (DPU):
For the first nine months of 2024, Suntec REIT reported a DPU of SGD4.622 cents, a 12% decline year-on-year, aligning with Maybank’s estimates. Distributable income from operations amounted to SGD1.58 cents per unit, excluding capital top-ups from asset divestments, such as Park Mall.
Revenue and Net Property Income (NPI):
The REIT’s revenue for FY24 is expected to reach SGD467.1 million, with a projected net property income of SGD319.5 million, showing slight growth amid a moderate operating environment.
Portfolio Performance by Geography
-
Singapore Portfolio:
Suntec’s Singapore properties remain its core revenue driver, with positive rental reversions of 12.9% in office spaces and 21.2% in retail. In 3Q24, shopper traffic rose 9% year-on-year, with stable tenant sales and strong leasing demand.
-
Australia Portfolio:
Australian properties showed improved occupancy in 3Q24, especially at Southgate in Melbourne and 55 Currie Street in Adelaide. Management expects further occupancy growth by 5 percentage points at 55 Currie Street.
-
UK Portfolio:
Signs of stabilization are seen in the UK portfolio, with the completion of backfilling at the Minister Building by FY24’s end. Contributions are anticipated to increase in FY25 after the initial lease incentive periods.
Strategic Moves and Valuation Updates
Target Price Increase:
The target price for Suntec REIT was raised from SGD1.10 to SGD1.25, reflecting a lowered risk-free rate of 2.75%. However, the broker maintained a “HOLD” recommendation due to potential valuation challenges.
Divestments and Acquisition Strategy:
Suntec has divested SGD50 million in office units year-to-date, with a target of SGD100 million for FY24. An asset-enhancement initiative (AEI) is planned for Suntec City Mall’s retail space, aiming for a return on investment of 30-40%.
Debt and Gearing
Gearing Ratio and Cost of Debt:
Current gearing stands at 42.3%, with a potential increase to approximately 43% by year-end due to valuation pressures in Australia. The interest coverage ratio (ICR) is 1.9x, marginally above the bank covenant threshold of 1.75x. The cost of debt has risen to 4.06% in September 2024, with projections indicating a further increase in FY25 as forex swaps expire.
ESG and Sustainability Initiatives
Suntec REIT has made strides in environmental sustainability, with several properties in Singapore maintaining their Green Mark certifications. Additionally, Australian assets improved their environmental ratings, and Suntec REIT secured an AUD450 million green loan in FY20 to finance eligible assets. Suntec REIT has committed to a 3% reduction in energy intensity by 2024 from a 2019 baseline.
Key Risks and Market Factors
Upside Factors:
- Higher-than-expected demand for leasing office or retail spaces.
- Positive rental reversions and accretive acquisitions.
- Occupancy improvements in office spaces, especially in the Singapore portfolio.
Downside Factors:
- Economic slowdowns impacting occupancy rates and rental prices.
- Rising interest rates, leading to higher debt servicing costs.
- Long-term leases ending, potentially impacting tenant retention.
Conclusion
With strong foundations and growth in occupancy and rental reversion, Suntec REIT is navigating a challenging market with strategic divestments, targeted AEIs, and prudent financial management. Nonetheless, the REIT faces potential valuation dips in Australia and growing debt costs, warranting a cautious investment stance.
