Suntec REIT: Resilient Performance Amidst Market Challenges

Date of Report: October 25, 2024
Broker: CGS International Securities

3Q24 Financial Results: Suntec REIT reported a 4.6% year-on-year decline in gross revenue, down to S$117.7 million, and a 5.7% decrease in net property income (NPI) to S$79.8 million. The decline was mainly due to reduced contributions from Suntec Convention, 55 Currie St, and The Minster Building. However, strong performance at Suntec Office and Suntec Mall helped offset some losses.
Distribution Per Unit (DPU): DPU for 3Q24 was 1.58 Singapore cents, aligning with 25.5% of the FY24 forecast.
Debt and Leverage: Aggregate leverage stood at 42.3% as of 3Q24. The all-in debt cost averaged 4.06% during this quarter, with an expectation to rise to 4.2% for the full year.

Office Space Performance: Suntec REIT’s Singapore office portfolio demonstrated robust occupancy at 99.1% as of end-3Q24. Notably, the portfolio benefitted from a 12.9% rental reversion in 3Q24, with Suntec Office alone achieving a 14% rental reversion on 132,000 square feet of leased space.
Future Rent Reversion: The trust has guided for continued positive rent reversions, with leases expiring in 4Q24/FY25 averaging S$9.59/S$10.05 per square foot.

Occupancy and Tenant Sales: Suntec Mall maintained a high occupancy rate of 98.4% as of end-3Q24. Although shopper traffic increased by 6% year-on-year, tenant sales showed a slight decline of 1%.
Rental Reversion and Growth: The mall achieved a robust 21.4% rental reversion in 3Q24. The management expects this positive trend to continue, driven by a favorable tourism outlook and increased events.
Suntec Convention: Revenue from Suntec Convention grew by 16.5% year-on-year in 1H24, supported by a rise in meetings, incentives, conferences, and exhibitions (MICE) events.

Australian Portfolio: Committed office occupancy in Australia reached 90.6% by 3Q24, an increase from previous quarters. Occupancy at 55 Currie St rose to 61.4%. However, the management noted challenging leasing conditions in Melbourne and Adelaide due to high vacancy rates and increased tenant incentives.
London Portfolio: The Minster Building in London had 8.7% of its space vacant as of 3Q24, but Suntec REIT aims to fully lease this space by the end of 2024, with the backfilling expected to contribute positively from FY25 onwards.

Divestments in Singapore: Suntec REIT successfully divested approximately 50% of its targeted S$100 million worth of strata units at Suntec Office.
Future Sales Plans: In the medium term, the REIT aims to divest mature assets in Australia, with transactions expected as market activity picks up.

ESG Scores and Goals: Suntec REIT achieved a combined ESG score of C+ for FY23, with environmental, social, and governance pillars rated B-, C, and C, respectively. The REIT scored an A+ for ESG controversies.
Environmental Goals: The REIT targets carbon neutrality for all assets in Australia and the UK by 2030 and full portfolio net-zero carbon status by 2050. Currently, 70% of its debt is green or sustainability-linked.
Social and Community Initiatives: Initiatives included a toy collection drive benefiting 2,000 underprivileged children and a donation drive at Suntec City supporting educational initiatives.

Broker Recommendations: CGS International Securities has reiterated its Hold rating on Suntec REIT, with a target price of S$1.38. The potential downside risk stems from the valuation of its Australian office portfolio and potential higher leverage. However, faster-than-anticipated balance sheet strengthening through asset recycling could be an upside.
Dividend Yield and Price Performance: Suntec REIT’s dividend yield for FY24 is projected at 5.0%, with potential increases to 5.7% by FY26. Its price target offers a 10.4% upside from the current price, as noted in the report.

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