Analysts are mixed on Suntec REIT T82U as higher financing costs from the US Federal Reserve (US Fed) rate hikes saw its distribution per unit (DPU) for 1QFY2023 come in below expectations 27.4% lower y-o-y at 1.737 cents. Suntec REIT’s 1QFY2023 ended on March 31.
While Suntec REIT reported a 9.6% and 2.7% y-o-y increase in revenue and net property income (NPI) to $108.7 million and $76.3 million in 1QFY2023, distribution to unitholders including $5.8 million of capital distribution was down 26.8% y-o-y to $50.3m on higher financing costs and lower joint venture (JV) income.
There is a “sell” call from OCBC Investment Research (OIR) and three “hold” calls, from CGS-CIMB Research, DBS Group Research and Maybank Research.
DBS Group Research analysts downgraded their recommendation for the REIT from “buy” to “hold”, with a lower target price of $1.48 from $1.60 previously.
CGS-CIMB Research analysts have kept their “hold” call with an increased target price of $1.48 from $1.39 previously. Maybank Research analysts have also kept their "hold" rating with an unchannged target price of $1.35.
Meanwhile, OCBC Investment Research has kept its ‘sell’ call with an unchanged target price of $1.22.
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The REIT’s 1QFY2023 update missed the expectations of the analysts at OIR and DBS although it stood in line with CGS-CIMB’s estimates.
In their April 27 note, DBS’s Rachel Tan and Derek Tan of DBS say they have lowered their FY2023 to FY2024 DPU estimates by 18% to 21% to factor in higher-than-expected interest costs and some potential vacancies from Suntec REIT’s Australia portfolio.
They believe the REIT’s current FY2023 yield of below 5% is lower than its peers.
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While Suntec REIT has seen a “strong turnaround” in its underlying portfolio, it has not been spared from higher interest costs. “Despite the fact that Suntec REIT’s underlying portfolio, especially Singapore assets, are seeing improved performance, the higher interest costs have been eroding its income, as its debt was only around 50% hedged previously,” explain the analysts.
“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%,” they add.
According to them, the REIT has maintained its stance of preferring asset divestments over exchange for risk (EFR) transactions should it need to take steps to recap its balance sheet. While EFR transactions potentially face complications, the DBS analysts note that this option should not be ruled out and could be a possible “avenue of last resort”.
“Suntec REIT’s management does not expect its gearing to breach the 45% limit and has been taking steps to ensure the same by negotiating with lenders for more relaxed covenant limits, which, as we understand it, they are willing to provide,” they say.
Meanwhile, Lock Mun Yee and Natalie Ong of CGS-CIMB note that Suntec REIT’s “robust” Singapore office performance was offset by poorer showings in the UK and Australia, as well a weaker Australian dollar (AUD) and British pound sterling (GBP).
Within its office portfolio, the REIT’s Singapore assets benefited from positive reversions of 11.2% in 1QFY2023, particularly from its Marina Bay Financial Centre (MBFC) properties, although this was partly offset by lower JV income due to higher interest expense.
Suntec REIT says that it expects market rent growth in Singapore to moderate on the back of slower macro outlook. However, it maintains that rent reversions are likely to remain positive with a still positive spread between in-place and market rents, say the CGS-CIMB analysts.
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On the other hand, Australia office contributions were 8.7% lower y-o-y due to a weaker AUD and higher interest expenses at Southgate Complex. “Despite achieving positive rent of 17.9%
in 1QFY2023, management indicated that revenue would likely be impacted by leasing downtime and incentives in the near term,” they explain.
Suntec REIT’s UK office contributions were also down at 15.4% y-o-y due to a weaker GBP as well as higher bad debt provision on a change in accounting policy at Nova Properties.
Within the retail portfolio, they note that Suntec Mall continued to enjoy a high occupancy of 98.5% in 1QFY2023. Rental reversion also continued to improve during the period, with a 16.5% positive reversion, the highest in the last four quarters, driven by both renewal and replacement leases.
The CGS-CIMB analysts have adjusted their FY2023 DPU estimates downwards “marginally” by 0.06%, but have raised their DPU estimates for FY2024 to FY2025 by 5.37% to 6.46%. They are assuming stronger convention income, leading to a higher dividend discount model (DDM) based target price of $1.48.
Maybank's Krishna Guha has lowered his FY2023 DPU estimates by a larger margin of some 7%, to reflect higher maintenance fund contributions and lower joint venture (JV) income.
"While we like improving operations and the stance to lower gearing through divestments, subdued transaction activity and the rising rate outlook pose headwinds," Guha explains.
OCBC’s research team adds that it expects Suntec REIT to be a beneficiary of the region’s reopening, providing a boost to retail, office and convention segments, it also notes that the REIT’s convention business would need to see larger scale international events return before a “firmer recovery” can happen.
Notwithstanding the “strong uplift” in the Singapore office portfolio seen in 1QFY2023, OCBC says the segment could still register “softer” positive rental reversions in FY2023 compared to FY2022.
“There also continues to be uncertainties over the longer-term impact of work-from-home trends, although more employers appear to be encouraging their employees to return to office,” it adds.
In Australia and the UK, Suntec REIT’s office portfolio is expected to be resilient, underpinned by firm occupancy and long weighted average lease expiry (WALE) and coupled with annual rent escalations in Australia.
However, OCBC also notes that there could be downside risks to asset valuations should interest rates remain elevated.
Other risks identified include currency fluctuations, Suntec REIT’s relatively high aggregate
leverage ratio — which increased slightly by 0.4% points q-o-q to 42.8% in 1QFY2023 — and a low interest rate coverage (ICR) ratio compared to peers, coupled with slower-than-expected divestment of its assets.
According to Maybank's Guha, Suntec REIT's gearing will be addressed by asset divestments, especially those with negative carry, with dilutive fund raising to be used as a "last resort".
As at 3.37pm, units in Suntec REIT were trading 3 cents or 2.17% down at $1.35.
