Analysts have mixed perspectives concerning Suntec REIT following the REIT’s results for the 4QFY2023/2024 and FY2023/2024 ended March 31.
Analysts from OCBC Investment Research (OIR), DBS Group Research and Maybank Securities’ Krishna Guha have maintained their “hold” calls on the REIT, while Citi Research’s Brandon Lee has kept his “sell” call.
“Suntec REIT’s Singapore operations have continued to gain good traction, with robust rental reversions achieved for both its retail and office portfolios,” says the OIR team.
Despite the REIT’s 1.0% y-o-y increase in gross revenue for 1QFY2024 to $109.8 million, its net property income (NPI) dropped by 3.8% to $73.4 million following “weaker” contributions from its overseas assets.
“Stronger performance of Suntec City was offset by lower contribution from most Australian offices and The Minster Building in the UK due to lower occupancy and, or higher incentives,” notes Guha.
Additionally, Suntec REIT experienced increasing financing costs with any capital distributions in 1QFY2024, which formed 23.2% of OIR’s initial FY2024 forecast. 1QFY2024 distribution per unit (DPU) also fell below expectations, dropping 13.0% to 1.511 cents.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
The REIT also reported “solid” rental reversions for its Singapore portfolio in both its office and retail segments, which rose by 11.4% and 21.7% respectively. Suntec City mall reflected a good performance with tenant sales and shopper traffic growing by 5% y-o-y.
Due to leasing downtime and improved incentives, the REIT’s Australia and UK offices continue to experience sustained headwinds.
Overall, Guha has lowered his target price by 10 cents from $1.20 to $1.10 after factoring in lower margins and contributions from overseas offices and lowering his DPU by 10%.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
Additionally, the REIT’s aggregate leverage ratio dropped by 0.1 percentage points (ppt) q-o-q to 42.2%. The REIT’s interest coverage ratio (ICR) dropped marginally to 1.9 times as compared to 2.0 times in 4QFY2023.
The OIR team notes that 57% of the REIT’s borrowings have been hedged, leaving it more “vulnerable” within a “higher for longer” interest rate environment.
Taking lower occupancy rates and higher financing costs into account, the OIR team has lowered their target price by 6 cents to $1.06 after cutting their FY2024 and FY2025 DPU forecasts by 4.8% and 6.2% respectively.
The team at DBS Group Research maintains their target price of $1.15 given the REIT’s “tight” valuation as compared to its peers.
“We continue to monitor potential asset recycling and Suntec’s effort on strata office sale to keep gearing stable,” says the DBS Group Research team.
Citi Research maintains ‘sell’ call in view of high gearing
Citi Research's Brandon Lee is the only analyst to maintain a “sell” call on the REIT, maintaining his target price of $1.13.
For more stories about where money flows, click here for Capital Section
“Suntec REIT expects lower revenue in Australia due to leasing downtime of vacancies and incentives,” says Lee.
The analyst notes that net effective rent reversion for Australia in 1QFY2024 was negative, resulting from high incentives. These incentives are anticipated to remain high while nationwide CBD office occupancy is expected to drop due to new supply.
Due to its poor performance, the analyst is “not surprised” that the REIT is open to selling its mature assets in Australia.
Units in Suntec REIT closed at an unchanged $1.09 on April 29.
