Suntec REIT: Riding the storm
- 3Q23 DPU -14% y-o-y (+3% q-o-q) to 1.79Scts, impacted by higher interest costs, in line
- Key positives: i) Strong double-digit positive reversions at Suntec City, Australia; ii) quicker recovery of Suntec Convention; iii) divest strata units to maintain gearing
- Key data to watch: i) Vacancy in Australia and UK, ii) higher refinance costs in FY24F, iii) valuation risks
- Maintain HOLD; lower TP to S$1.10
- Suntec’s 3Q23 DPU -14% y-o-y (+3% q-o-q) to 1.79 Scts, in line with our estimates. The portfolio showed some improvements operationally but was impacted by higher interest costs.
- While gearing is relatively stable at 42.7%, the ICR ratio inched lower q-o-q to 2.0x, vs. 2.1x in 2Q23. It has a sufficient buffer after bank covenants were lowered to 1.75x.
- Portfolio occupancy declined marginally to 98.1% vs. 98.4% in 2Q23, mainly from the Australia (-1.2ppt q-o-q to 95.4%) and UK portfolios (-6.5ppt q-o-q to 93.5%). The latter was mainly affected by the Minster Building, which saw occupancy decline to 87.3% from 100% in 2Q23. Meanwhile, the Australia portfolio’s occupancy fell mainly due to Southgate (-2.8ppt q-o-q to 85.8%) and 55 Currie (-3.6ppt q-o-q to 96.4%).
- Singapore occupancy continues to see improvements.
- The office portfolio continues to deliver strong double-digit positive reversions, both in Singapore (+14.4% in 3Q23) and Australia (+12% in 3Q23). Similarly, Suntec City Office and Suntec City Mall delivered strong positive reversions, at 14% and 25.3% in 3Q23, respectively.
- 3Q23 tenant sales psf at Suntec City Mall is estimated to be c.5% above pre-Covid levels, and relatively flat y-o-y, as Singapore fully reopened from May 22 onwards.
- Suntec Convention saw a strong recovery ahead of expectations. Revenue doubled while NPI almost tripled.
Key takeaways from results briefing
Targets to divest strata units worth S$100m to keep gearing at sustainable levels given risks of asset valuation decline, especially from overseas portfolio.
- The decline in occupancy at the Minster property was due to a co-working operator that was defaulting in rents whose space Suntec has taken back since Jul 23. Suntec has a rent guarantee until Sep 23 and is currently in discussion with an existing tenant who is looking to expand to partially backfill the vacancy.
- The lower occupancy at Southgate was due to two tenants rightsizing and returning one floor each.
- The non-renewal of the government tenant at 55 Currie will impact occupancy in 4Q23. As such, occupancy at 55 Currie is expected to decline to c.60% from the current 96.4%. Management is working on backfilling the space, but the expected downtime could be 12 months, given it is a large space.
- Management expects the valuation for Singapore assets will likely hold steady given the strong underlying performance. However, overseas assets could be impacted by a c.100bps expansion in the discount rates.
- As such, management plans to divest strata units worth c.S$100m at the Suntec City Office. Suntec has sold some 11k sqft of strata units at prices of more than S$3k psf, which make up c.40% of the targeted S$100m. Management believes the divestment will be accretive and help keep gearing at sustainable levels, given risks of an asset valuation decline.
- Suntec currently does not have a share buyback mandate but will consider it if it is an appropriate strategy.
- The expected average cost of debt in FY24F post refinancing at the current rates is 4.25%
Maintain HOLD; lower TP to S$1.10. Risks of interest rates and asset valuation remain, as high interest rates are expected to stay for longer.
We maintain HOLD but lower our TP to S$1.10 from S$1.48. We lower our FY24F DPU estimates by c.2% to factor in higher vacancies from the UK and Australia portfolios. In addition, we raised our discount rate by increasing the cost of debt by 25bps to factor in higher valuation risks. We have yet to factor in the potential accretion from the divestment of strata units.
Despite improvements in the Singapore portfolio, Suntec’s earnings continue to be impacted by higher interest rates and expenses. Refinancing of FY24 debt remains a concern, as it appears that the high interest rates are here to stay for longer. Given the higher-for-longer interest rates, concerns are arising about asset valuation at the year-end, though the better performing Singapore assets will moderate some of the impact. In addition, capital distributions will taper off in FY24. We continue to keep watch on the re-rating catalysts, which include i) a turn in the interest rate cycle and ii) stronger recovery in the Australia and UK office markets. Suntec currently trades at 5.7% FY24F yield and 0.5x P/NAV. Its current yield is still lower than that of its peers.
FY Dec | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
Gross revenue | 204 | 224 | 224 | 10.2 | 0.3 |
Property expenses | (50.6) | (60.9) | (71.0) | 40.2 | 16.6 |
Net Property Income | 153 | 163 | 153 | 0.3 | (5.9) |
Other Operating expenses | (33.5) | (33.6) | (34.0) | 1.3 | 1.1 |
Other Non Opg (Exp)/Inc | 4.10 | 3.99 | 2.38 | (42.0) | (40.4) |
Associates & JV Inc | 104 | 40.7 | 37.3 | (64.2) | (8.5) |
Net Interest (Exp)/Inc | (47.8) | (64.5) | (73.5) | (53.8) | (14.0) |
Exceptional Gain/(Loss) | 54.3 | 11.1 | (7.3) | N/A | N/A |
Net Income | 234 | 121 | 78.3 | (66.6) | (35.1) |
Tax | (8.7) | (7.5) | (7.5) | (13.6) | 0.2 |
Minority Interest | (4.0) | (16.8) | 0.81 | N/A | (104.8) |
Net Income after Tax | 221 | 96.3 | 71.5 | (67.7) | (25.7) |
Total Return | 276 | 201 | 72.1 | (73.8) | (64.2) |
Non-tax deductible Items | (142) | (88.4) | 23.8 | (116.8) | (127.0) |
Net Inc available for Dist. | 138 | 117 | 101 | (27.2) | (14.4) |
Ratio (%) |
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Net Prop Inc Margin | 75.1 | 72.8 | 68.3 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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