Analysts are lukewarm on Suntec REIT T82U amid moderating outlook and limited catalysts, following the REIT’s 1HFY2023 ended June results announcement.
Suntec REIT’s operational DPU was down 30% y-o-y in 1HFY2023 due to higher financing costs, foreign exchange impact and higher operating expenses. The REIT continued with a capital top-up of $11.5 million for the first half of the year, and has a $11.5 million balance top-up from past gains which is expected to be distributed in 2HFY2023.
Revenue growth was dragged down by a 54% increase in net finance costs, which are expected to increase further in 2HFY2023 and remain elevated next year. Property expenses rose 40%, mainly from the increase of management corporation strata title contributions for Suntec City.
“While no revaluations were done in 1HFY2023, based on its peer Keppel REIT’s K71U results and the REIT manager’s guidance, overall valuations are expected to remain stable and unlikely to see a large decline of over 3%,” says CGS-CIMB analysts Lock Mun Yee and Natalie Ong, who have kept their “hold” call on Suntec REIT with a target price of $1.48.
Suntec REIT’s Singapore office occupancy rose 80 basis points h-o-h, while rental reversion was 10.8%. However, management guided for plateauing of rents and potential non renewals for FY2024, Maybank Securities analysts Krishna Guha notes.
He adds that the trust’s Australian office occupancy dipped 100 basis points h-o-h, with guidance of slowing leasing momentum and non renewals amid new supply.
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For retail, Suntec City mall occupancy remains high at 98.2%. Although reversions continue to accelerate and were at 17.5% for 1HFY2023, tenant sales have started to soften, Guha points out. While the convention centre is expected to benefit from easing of China’s restrictions in 2HFY2023, a full recovery will only be in 2024, he adds.
Guha has kept his “hold” call on Suntec REIT with a lower target price of $1.30 from $1.35 previously.
JP Morgan analysts Terence M Khi, Mervin Song and Cusson Leung highlights that the management has kickstarted efforts to reduce gearing with the divestment of three strata units in Suntec City office towers amounting to $28.9 million. However, they believe the REIT management would need to accelerate divestment efforts of mature Australia assets and of more strata offices at Suntec City in 2HFY2023.
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While divestment options are being evaluated for its Australian assets market, conditions remain challenging with limited buyers, RHB Bank Singapore analyst Vijay Natarajan notes. The REIT has also successfully negotiated with its lenders to lower the interest cover ratio on its loan covenants, giving it more flexibility in case of a prolonged high interest rate environment, he adds.
Moving forward, Suntec REIT’s capital management and asset divestments will continue to dictate share price performance, says Citi Research analyst Brandon Lee. The divestment of the three strata units in Suntec City office is a good first step, but the analyst would like to see more sizable asset sales and lower gearing of 35% to 38% before turning more positive on the stock.
The JP Morgan, RHB and Citi analysts have kept their “underweight”, “neutral” and “sell” calls on Suntec REIT, with target prices of $1.25, $1.40 and $1.13 respectively. The analysts expect a negative share price reaction on the earnings miss.
On a q-o-q basis, the average cost of debt for Suntec REIT appears to have stabilised. Given minimal debt expiry left to be refinanced in 2023, DBS Group Research does not expect a major spike up of interest costs in 2HFY2023.
“However, refinancing of FY2024 debt remains a concern should interest rates remain high for longer. In addition, capital distributions will taper off in FY2024,” they add.
The analysts continue to keep watch on the re-rating catalysts, which include the US Federal Reserve cutting interest rates, stronger recovery in Australia and UK office markets, as well as Chinese tourists returning to drive higher organic performance.
DBS has kept their “hold” call and target price at $1.48.
As at 1.50pm, units in Suntec REIT are trading 2 cents lower or 1.55% down at $1.27.
