Suntec REIT’s headline distributions per unit (DPU) for FY2023 ended December 2023 is underwhelming for FY2023 ended December 2023, declining 19.3% y-o-y to 7.135 cents.
In contrast, Suntec REIT, which owns income-producing real estate that is primarily used for office or retail purposes, reported a DPU of 9.507 cents in pre-Covid FY2019.
In FY2023, Suntec’s DPU from operations fell 21.6% y-o-y to 6.341 cents. DPU was topped up to 7.135 cents from gains from the sale of Park Mall in 2015. These gains have been largely distributed.
Analysts are neutral to negative on Suntec REIT’s outlook despite its Singapore portfolio offsetting weakness in its UK and Australian properties.
CLSA has downgraded Suntec REIT to a “sell”. “Despite weaker overseas performance, the Singapore portfolio-held firm, with respectable operating metrics for FY2023. Rent reversions for office and retail were 12% and 22% in FY2023, with management guiding +5% and 10%–15% for its Singapore office and retail, respectively, in FY2024,” says CLSA’s Jan 25 note.
Aggregate leverage was only very marginally higher as the valuation of the Singapore portfolio supported the REIT despite lower valuations for its London and Australian properties. “We trimmed earnings by around 2% to factor in elevated interest rates and downgrade to sell,” CLSA says.
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Chong Kee Hiong, CEO of Suntec REIT’s manager, has a stated strategy to bring the REIT’s aggregate leverage of 42.4% as of Dec 31, 2023, down to 40%. Its aggregate leverage is still within 45% for its interest coverage ratio (ICR) of two times. Still, Chong would be more comfortable with a lower aggregate leverage.
Suntec REIT’s ICR includes the impact of its two tranches of perpetual securities issued in 2020 and 2021. In previous briefings, Chong had expressed a wish to improve Suntec REIT’s ICR and stated that equity fundraising (EFR) is unlikely to be an option for the REIT.
One way to lower gearing is to continue to divest strata-titled units at Suntec’s office towers. In 2023, Suntec REIT raised $94.4 million from the sale of strata-title units at an average of a 31% premium to book value.
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Asked if Suntec REIT could top up DPU with gains from the sale of Suntec City’s strata units, Chong says: “We have to look at [the gains] on a case-by-case basis. We’ve made divestment gains, but the interest rate cycle is still uncertain. Gearing is still high so we will take it one step at a time.”
Although the interest rate cycle may have peaked with base rates and margins easing, Suntec REIT’s manager expects the average cost of debt to remain at its current level of 4.2%. In 2024, the REIT has interest rate hedges dropping off that it entered during the low-rate environment and these would inevitably cost more.
Given the rate cycle, Chong would like to divest one of the Australian office buildings if possible. However, liquidity and financing options are limited for large transactions and the actual selling prices of buildings may be lower than valuations for these large transactions. “Transactions are about 20% to 25% off their last valuations. There is a gap between valuation and transaction prices,” Chong adds.
In FY2023, Australia contributed 18% to the REIT’s income and accounted for 14% of AUM. Operationally, NPI (net property income) from its Australian properties was 9.5% lower y-o-y in 2HFY2023 and 14.3% lower in Singapore dollars.
The Australian portfolio, valued at $1.72 billion as of Dec 31, 2023, is down 5.3% y-o-y in Singapore dollars. The portfolio comprises five buildings: 177 Pacific Highway in Sydney, Southgate Complex Melbourne, 477 Collins Street Melbourne, 35 Currie Street Adelaide and 21 Harris Street Sydney.
Chong has classified the Australian portfolio as core and core-plus. Core refers to properties Suntec REIT plans to hold while it is willing to part with core-plus properties. Among them, 477 Collins Street is considered core while 21 Harris Street and 177 Pacific Highway are fully occupied and core.
Only the 50% stake in Southgate Complex in Melbourne is core-plus. At a valuation of $328.2 million as of Dec 31, 2023, Southgate is one of two Australian properties that is valued above its purchase price of $299.8 million in 2016. The other is 177 Pacific Highway, last valued at $618.6 million compared to its purchase price of $457.5 million.
