Analysts are mostly negative on Suntec REIT after the REIT reported a 14.0% y-o-y drop in its distribution per unit (DPU) for the 3QFY2023 ended Sept 30.
DBS Group Research, Maybank Securities and RHB Bank Singapore kept their “hold” and "neutral" calls with lowered target prices while Citi Research kept its “sell” call. Its target price also remained unchanged at $1.13.
PhillipCapital was the only brokerage to keep its “buy” call and target price of $1.47, the highest among the four brokerages featured here.
To PhillipCapital’s Liu Miaomiao, Suntec REIT’s 3QFY2023 results came in within her expectations.
The REIT’s 3QFY2023 gross revenue grew by 15% y-o-y to $123.4 million, at 79.7% of her FY2023 forecast while its net property income (NPI), which rose by 9.7% y-o-y to $84.6 million, stood at 77.9% of her full-year estimates.
The REIT’s DPU for the 9MFY2023 also stood at 76.3% of Liu’s full-year forecast.
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In her report dated Oct 24, Liu noted the REIT’s positive rental reversions. She also liked that the REIT’s current divestment plan is on track so far.
“Suntec is committed to its current divestment plan, aiming to sell strata units at Suntec Office Tower 1 - 3 worth $100 million by the end of FY2023. Selling prices are supported by strong demand from end-users and limited supply due to the Urban Redevelopment Authority’s (URA) restrictions on new developments. By 3QFY2023, approximately 40% of the divestment plan was completed, with prices 20% above book value. This is likely to reduce gearing by 100 basis points (bps), providing a buffer against potential year-end valuation declines,” Liu writes.
“The management expresses confidence in the Singapore market and foresees no change in cap rates. While gearing improvement from divestment may be offset by overseas asset devaluation, it is expected to remain below the 45% threshold,” she adds.
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However, the REIT’s cost of debt, which increased by 37 percentage points y-o-y and 0.14% percentage points q-o-q to 3.78% as at Sept 30, remains a concern.
“[Suntec REIT’s] adjusted interest coverage ratio (ICR) deteriorated to 2.0x [from 2.1x in 2QFY2023], capping the regulatory gearing limit at 45%,” she points out.
On this, the analyst expects Suntec REIT’s all-in interest cost in FY2024 to reach 4.25%.
“There is no commitment to top-up the distributional income using excess cash yet in FY2024,” she notes.
The REIT’s overseas markets have also displayed weaker metrics. In the UK, the REIT’s overall occupancy rate fell by 6.5 percentage points q-o-q to 93.5% while its Australian portfolio occupancy rate fell by 1.2 percentage points q-o-q to 95.54%.
“Leasing movement in UK and Australia markets were crippled by the cautious economic outlook with hampered expansionary drivers. 55 Currie Street is expected to have reduction in occupancy rate of 40%. Management allocated 12 months to backfill the space and anticipate rental reversion to be flattish but in line with market rate,” says Liu.
Looking ahead, the analyst expects Suntec REIT’s Singapore market to be its key revenue driver double-digit rental reversion for the retail side to continue and high single-digit for office sector in FY2024.
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“We have also observed a decreasing trend in occupancy costs, which supports the potential for higher rental reversion,” she notes.
“In the UK office market, it seems to have reached its bottom, and we do not foresee any further drops in occupancy rates in FY2023. However, the transaction market in Australia remains subdued, characterized by a widened price gap between buyers and sellers, which is currently hindering the divestment of 177 Pacific Highway in the near term,” she adds.
Based on Suntec REIT’s last-closed price of $1.10 as at Oct 23, the REIT implies DPU yields of 6.08% or 7.16% for the FY2023 and FY2024 respectively, based on Liu’s estimates.
“We believe much of the downside risk including larger-than-expected expansion in cap rate and slower-than-expected divestment have been factored into the current share price. As such, our dividend discount model (DDM)-based target price remains at $1.47 with FY2023 – FY2024 DPUs of 6.68 cents - 7.87 cents,” she says.
DBS Group Research’s Rachel Tan and Derek Tan have lowered their target price to $1.10 from $1.48 previously, which is the lowest among the brokerages within this article.
While Suntec REIT’s 3QFY2023 DPU stood in line with their estimates, the analysts have lowered their FY2024 DPU estimates by 2% to factor in higher vacancies from the REIT’s UK and Australia portfolios.
“In addition, we raised our discount rate by increasing the cost of debt by 25 bps to factor in higher valuation risks. We believe the current FY2024 yield, at [under] 6%, is lower than that of its peers,” the DBS analysts write.
Meanwhile, they acknowledge the REIT’s key positives, which are its strong double-digit reversions at Suntec City and in Australia, the quicker recovery of Suntec Convention and the divestment of its strata units to maintain its gearing.
However, the REIT’s higher interest costs remain a concern.
“Despite the fact that Suntec’s underlying portfolio, especially its Singapore assets, is seeing improved performance, the higher interest costs have been eroding its income, as its debt was only [around] 50% hedged previously. Despite the payout of its remaining capital distributions in FY2023, we estimate that its two-year DPU compound annual growth rate (CAGR) will decline by 15%,” say the DBS analysts.
Other key data to watch are the REIT’s vacancies in Australia and the UK, higher refinancing costs in FY2024 and valuation risks.
“Suntec REIT will be the key beneficiary should interest rates decline at an accelerated rate,” the analysts add.
Maybank Securities’ Krishna Guha has also lowered his target price to $1.15 from $1.30 due to a continued risk of lower asset values and higher funding costs.
The REIT’s DPU for the 9MFY2023, however, remained in line with his expectations at 76.6% of his full-year estimates.
“Top-line growth was anchored by accelerated recovery of the convention business. However, higher interest costs and lower margins moderated distribution,” says Guha.
“Unlike overseas assets, Singapore occupancy was steady while reversions strengthened for office and retail. Divestment continues albeit at a slow pace,” he adds.
“While Suntec’s valuation (6.9% FY2023 dividend yield, 0.5x P/B) is attractive in a historical context, downside risk remains from elevated gearing, potentially lower asset values and continued repricing of interest costs,” he continues.
RHB's Vijay Natarajan cut his target price to $1.20 from $1.40 due to a lack of catalysts on the REIT. That said, Suntec's 3QFY2023 results are in line with his expectations.
"Its Singapore operations continues to perform well, with improvement seen across all three segments, but the outlook for overseas assets has dimmed. Interest cost will continue to weigh heavily on its bottomline in FY2024, with the REIT being one among the lowly hedged ([around] 55%) in the S-REIT space. More divestment of Suntec City strata office space is expected in the near term to address its high gearing levels," says Natarajan.
Citi’s Brandon Lee has kept his target price unchanged as he sees “no respite” for the REIT on its high gearing.
“We came away from Suntec REIT’s 3QFY2023 business updates call with an unchanged view and rating, given gearing is expected to remain at a relatively high level of [around] 43% despite resilient capital values of Suntec City Office, while softer office markets and flattish (with potential downside) earnings trajectory are further negatives,” he writes in his Oct 23 report.
Despite the REIT’s efforts in divesting $100 million of Suntec City Office strata units, the move, which should reduce Suntec REIT’s gearing by 100 bps, will be offset by softening y-o-y valuations in Australia and the UK (with Singapore flat on unchanged cap rates). The softening valuations in Australia and UK would bring the REIT’s gearing up by 100 bps, which would mean that its FY2023 gearing should be relatively unchanged at 42.7%.
Furthermore, the Singapore office sector is also softer due to tenants who are very cautious and are in cost containment mode due to the weaker macro outlook and high debt cost.
“While Suntec REIT is facing some resistance during rent increases, it will likely notch positive rent reversions (albeit not double-digit) and high occupancy of 98%,” says Lee of its Singapore office portfolio.
“In UK, the exit of a co-working operator (which did not pay rent from January 2023 to July 2023) led to The Minster’s 12.7 percentage points fall in occupancy, though Suntec has rental guarantee through September 2023 and guided there is an existing tenant in the building which is looking to expand, which may reduce downtime,” he adds. “In 55 Currie, existing occupancy of 96.4% could decline to 60% after factoring in the non-renewal of a government tenant, which would take 12 months to backfill.”
However, all is not lost for the REIT.
“Despite guiding for higher debt cost of 4.25% in FY2024 (versus 3.78% in 9MFY2023), there could be some cost savings from lower margins during refinancing of its $900 million debt expiring in 1HFY2024,” says Lee. “FY2024 retail rent reversion should come in at +15% - 20%, with good tenant sales enhancing overall rental revenue given turnover rent contributing 6% -7%.”
“However, lack of capital distributions (none planned in FY2024), potentially lower NPI margin overseas (due to lower occupancy) and higher-for-longer interest rate could impact DPU in our view,” he adds.
Units in Suntec REIT closed 3 cents higher or 2.70% up at $1.14 on Oct 24.
