Suntec REIT: Not spared from Fed rate hikes
- Downgrade to HOLD; lower TP to S$1.48. 2-year DPU CAGR estimated to fall by 15%, FY23F yield <5%
- 1Q23 DPU -27% y-o-y (-30% y-o-y on core DPU) on higher interest rates and weaker AUD/GBP, below estimates
- Key positives: i) Strong reversions at Suntec City, ii) capital payout to cushion DPU
- Key data to watch: i) Higher interest costs, ii) potential vacancy in Australia
- 1Q23 DPU -27% y-o-y to 1.737 Scts, below our estimates, mainly impacted by higher interest cost, and the weaker AUD and GBP, partially offset by the capital distribution of S$5.8m. 1Q23 core DPU (excluding capital distribution) was down 30% y-o-y to 1.538 Scts.
- On a q-o-q basis, 1Q23 revenue and NPI -7% q-o-q and -11% q-o-q, respectively, held up by the Singapore portfolio (NPI +5% q-o-q), partially offset by the weaker AUD and GBP.
- The Suntec Convention Centre’s 1Q23 NPI remained in positive territory, at S$0.5m, though it was a little muted vs. 4Q22 NPI of S$5.6m, mainly due to higher costs and maintenance fund and sinking fund contributions. We expect a stronger pickup in 2H23 with more MICE events and the easing of China’s travel restrictions.
- Similarly, JV income fell 26% y-o-y to S$22.8m, mainly due to higher interest expenses, the weaker AUD and GBP, and higher bad debt provisions at Nova Properties, despite stable operating performance at the properties.
- Gearing remained relatively flat at 42.8%, vs. 42.4% in 4Q22. ICR declined to 2.2x vs. 2.4x in 4Q22.
- Average cost of debt increased by 74bps q-o-q to 3.68%, vs. 2.94% in 4Q22. Hedging ratio improved to 72%, vs. 66% in 4Q22.
- Portfolio occupancy inched up marginally by 0.2ppt q-o-q to 98.4%, mainly from Singapore assets (office: +0.4ppt; retail: +0.2ppt). Suntec City Office, Suntec City Mall, and 477 Collins achieved 100% occupancy this quarter, partially offset by lower occupancy at Southgate, -2.2 ppt q-o-q to 90.1%.
- Suntec City Mall and Suntec City Office recorded double-digit positive reversions. Singapore office reversions remained strong at +11.2%, vs. +10.6% in 4Q22, with Suntec City Office recording +10.5% in 1Q23, vs. +7.7% in 4Q22. Suntec City Mall recorded stronger reversions, +16.5%, vs. 9.9% in 4Q22, as recovery continues.
- Tenant sales (whole mall) stayed 10% (average) above pre-COVID levels. Suntec City Mall’s same-store tenant sales hovered around the pre-COVID levels during the quarter (average -2.7% of pre-COVID). Shopper traffic was stable q-o-q at 86%. The softer tenant sales were partly due to seasonality (from cinema and gym businesses). Management expects tenant sales to remain stable at the current levels and expects a stronger 2H23, boosted by more tourist spending.
- Australia office occupancy fell marginally q-o-q due to lower occupancy at Southgate; reversions remained strong but likely weighed down by leasing downtime and higher incentives. Suntec’s Australia office occupancy fell marginally by 0.3ppt to 97.3% (477 Collins recorded 100% occupancy, but it was offset by lower occupancy at Southgate). Reversions remain strong at 17.9%, vs. 24.3% in FY22. However, leasing downtime and higher incentives could weigh down portfolio performance.
- UK portfolio remains stable. While the UK portfolio remains stable given its long WALE, recessionary challenges may continue to weigh down the office market. Management is proactively managing leases to maintain occupancy and asset value. There are some lease breaks coming up in 2024 (6.4%) and 2025 (13.6%).
- Suntec is actively looking at the potential divestment of its mature assets to strengthen its balance sheet.
- Management expects to pay the remaining S$23m of capital distributions in FY23.
- Management expects average cost of debt could possibly inch up close to c.4% from the current 3.68% after the refinancing of the remaining debt expiring this year.
- Loan covenant ICR at c.2.5x; in the process of lowering the covenant to 1.75x. While the ICR ratio (MAS calculation) is below 2.5x, the ICR ratio (based on loan covenant calculation) is at 2.4-2.5x. Nevertheless, Suntec is in the process of lowering the ICR covenant to 1.75x. Lenders have agreed and are currently finalising the documentation.
- Management does not expect gearing to hit 45%, despite the valuation decline, based on its sensitivity tests. Based on management’s sensitivity tests, gearing may hit 45% if its non-Singapore portfolio sees a 100bps expansion. Management’s base case is: Its Singapore assets see a 10bps expansion while its non-Singapore portfolio cap rates expand by 50bps. Gearing will not breach the 45% gearing if the valuation decline occurs as per the said base case.
- Management prefers divestment over EFR, but progress is slow; EFR an option but need sponsor/major shareholders’ support. Management still prefers divestment (Suntec strata office or Australia assets) over equity fundraising (EFR), which will dilute NAV. However, they acknowledge that progress is slow as interest rates remain volatile. EFR remains an option should the need arise, and to pull it through, the REIT would need sponsors and support from its major shareholders.
- Expect FY23 office reversions of 5%-6%. Singapore office rental growth is expected to moderate but Suntec continues to expect to record positive reversions of 5%-6% in FY23. Expiring rents at Suntec City Office are at S$9.62psf.
- Expect stronger retail reversions at 10%-15% in FY23. Management is optimistic about retail reversions and expects FY23 to continue to record double-digit reversions of 10%-15% as we continue to see recovery post COVID.
- Backfilling of Singapore office completed; potential vacancy from Australia portfolio at year-end. i) The SCB vacancy at MBFC has been 90% backfilled, with 30% already contributing rent in 1Q23. The remaining backfilled tenants will be moving in from 2Q23; ii) 55 Currie’s anchor tenant (government) will be moving out in 4Q23, which will result in a 42% vacancy. Two new prospects have requested for request for proposal (RFP); iii) The leases expiring at Southgate in FY23 comprise c.6% of total lease expiries of Suntec’s portfolio. Management is confident that c.50%-60% of this will get renewed and is currently engaging tenants on the remaining leases.
- Physical occupancy remains soft in Australia from 35% (177 Pacific Highway) to 70% (55 Currie). Nova Properties is at 65% while Minster Building is at 30%-40%.
- Minimal risk from tech tenants at Suntec City Office. Given the softening of the tech sector, management estimates only 3.5% of tech tenant leases may be at risk. Tech tenants comprise c.28% of Suntec’s Singapore office portfolio.
We believe Suntec’s current FY23F yield, at <5%, is lower compared to that of its peers. Despite management’s preference for divestments to recap its balance sheet, EFR remains an option, though this would be complicated, given its shareholding structure.
We continue to keep watch on the re-rating catalysts, which include i) the Fed pausing interest rate hikes or starting to cut interest rates and ii) stronger return-to-office/recovery in the Australia and UK office markets.
| FY Sep | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
|---|---|---|---|---|---|
| Gross revenue | 191 | 204 | 224 | 16.9 | 9.9 |
| Property expenses | (49.3) | (50.6) | (60.9) | 23.5 | 20.2 |
| Net Property Income | 142 | 153 | 163 | 14.7 | 6.5 |
| Other Operating expenses | (33.2) | (33.5) | (33.6) | 1.2 | 0.2 |
| Other Non Opg (Exp)/Inc | 6.66 | 4.10 | 3.99 | (40.0) | (2.7) |
| Net Interest (Exp)/Inc | (51.2) | (47.8) | (64.5) | (25.8) | (34.9) |
| Exceptional Gain/(Loss) | 26.1 | 54.3 | 11.1 | (57.5) | (79.6) |
| Net Income | 149 | 234 | 121 | (19.1) | (48.5) |
| Tax | (22.5) | (8.72) | (7.52) | (66.6) | (13.8) |
| Minority Interest | (14.5) | (4.02) | (16.8) | (15.9) | 318.1 |
| Net Income after Tax | 112 | 221 | 96.3 | (14.1) | (56.5) |
| Total Return | 350 | 276 | 201 | (42.5) | (27.0) |
| Non-tax deductible Items | (214) | (142) | (88.4) | (58.7) | (37.8) |
| Net Inc available for Dist. | 129 | 138 | 117 | (9.0) | (15.0) |
| Growth & Ratio | |||||
| Net Prop Inc Margin (%) | 74.2 | 75.1 | 72.8 | ||
| Dist. Payout Ratio (%) | 100.0 | 100.0 | 100.0 |
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