Maybank Securities, CGS International (CGSI) and OCBC Investment Research (OIR) have maintained their “hold” calls on Suntec REIT following its business update for the 3QFY2024 ended Sept 30.
On Oct 24, Suntec REIT reported a distribution per unit (DPU) from operations of 1.58 cents, 0.9% lower y-o-y. Without capital distributions, the REIT’s 3QFY2024 DPU fell by 11.2% y-o-y.
The REIT’s 3QFY2024 gross revenue and net property income (NPI) fell by 4.6% and 5.7% y-o-y to $117.7 million and $79.8 million, respectively. This is attributed to the lower contribution from Suntec Convention, 55 Currie Street and The Minster Building properties, though partially offset by stronger performance at Suntec Office and Mall.
Suntec’s 3QFY2024 DPU met the expectations of CGSI analysts Lock Mun Yee and Natalie at 25.4% of their FY2024 forecast. Meanwhile, Suntec’s 9MFY2024 DPU of 4.62 cents, 12% lower y-o-y, was in line with OIR’s estimates at 75.2% of the team’s FY2024 estimates. The nine-month DPU was also within the expectations of Maybank analyst Li Jialin, with Li expecting an FY2024 DPU of 6.9 cents.
Li, who has increased her target price to $1.25 from $1.10, sees the REIT’s fundamentals improving, with signs of Suntec REIT’s UK assets bottoming out and improvements in the occupancy of its Australian portfolio.
However, she adds that the REIT’s manager remains “cautious” about a potential dip in valuations of $200 million due to cap rates in the Australian market.
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The CGSI analysts and OIR team have kept their target prices unchanged at $1.38 and $1.19, respectively.
Suntec’s Singapore portfolio
Suntec’s Singapore office occupancy remained healthy at 99.1% at the end of 3QFY2024, boasting a positive rental reversion of 12.9% on 132,000 sq ft of land leased.
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OIR notes that the current signing rents at Suntec City Office range between $10.50 per sq ft per month (psf pm) and $12 psf pm.
As such, Maybank analyst Li Jialin notes that “positive rent growth of mid-to-high single digit for Suntec offices is expected to extend into FY2025.”
“Strong shopper traffic and stable tenant sales account for strong leasing demand”, Li adds, noting that shopper traffic grew 9% y-o-y while tenant sales fell 1% y-o-y.
According to CGSI’s Lock and Ong, “Suntec Convention revenue jumped 16.5% y-o-y to $28.2 million in 1HFY2024, on higher meetings, incentives, conferences and exhibitions (MICE) events and positive tourism outlook.”
Meanwhile, occupancy costs increased to around 23% in 3QFY2024.
Looking ahead, OIR notes that management expects its Singapore retail reversions to reach the 15% to 20% range in FY204, and this is expected to moderate to a healthy level of 10% to 15% in FY2025.
Furthermore, Maybank’s Li notes that Suntec’s management is planning an asset enhancement initiative of 15,000 to 17,000 sq ft of retail space at Suntec City Mall, starting in 2H2025. This has an expected return on interest (ROI) of 30% to 40%.
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Suntec’s overseas portfolio
Suntec’s occupancy of its Australia portfolio rose by 1.5 percentage points (ppts) q-o-q to 90.6% in 3QFY2024, due to Southgate and 55 Currie Street.
Suntec’s management expects occupancy at 55 Currie Street to grow by another 5 ppts.
However, CGSI’s Lock and Ong recognise that “the office leasing environment in Melbourne and Adelaide remains challenging due to elevated vacancy levels and heightened tenant incentives.”
As such, the REIT manager expects a further cap rate expansion of 50 to 100 basis points (bps) in its upcoming year-end valuation exercise, leading to a valuation dip of $200 million.
OIR notes that Australia’s 9MFY2024 rental reversions were positive at 13.3%, but they are of the opinion that this refers to face rent values and current incentive levels remain high.
Maybank’s Li notes that “backfilling at UK’s Minister Building is expected to complete by end-FY2024 and contributions should begin in FY2025 after the incentive periods.”
Suntec REIT also managed to remove all break clauses for FY2025 in its UK portfolio but will have to provide some incentives to tenants in return.
Suntec’s balance sheet metrics
OIR notes that “Suntec’s balance sheet metrics [are] unlikely to improve in the near term.”
The REIT’s aggregate leverage ratio remained at 42.3%, unchanged from the previous quarter. The proportion of borrowings hedge increased 6 ppts q-o-q to 61%, while all-in financing costs increased 4 bps to 4.06%.
With an expected decline in cap rates in Australia, Maybank’s Li expects Suntec REIT’s gearing to increase slightly to 43% by the end of the year, up from its current gearing of 42.3%.
The OIR team expects the same increase in Suntec’s leverage, with capital values in Singapore and the UK expected to remain stable.
As at 3.11pm, units in Suntec REIT are trading 2 cents lower or 1.63% down at $1.21.
