The research team at OCBC Investment Research (OIR) has downgraded Suntec REIT to “sell” from “hold” after the REIT’s unit price outperformed the FTSE ST All-Share REIT Index (FSTREI).
As at the close of Sept 19, the REIT’s unit price rallied by some 16.1% since July 31, outperforming the FSTREI’s increase of 9.8% over the same period, notes the team in its Sept 20 report.
Even though Suntec REIT, with its higher proportion of floating rate debt, could be the first to benefit from the Federal Reserve’s (Fed) rate cut cycle, the team notes that there are risks of a rebound in the 10Y US Treasury (UST) yields, depending on the outcome of the US presidential elections.
Furthermore, Suntec REIT’s all-in financial costs, which are at 4.02% as at June 30, may not lower significantly in the near-term as the REIT has a “sizeable amount” of interest rate hedges that are expiring in FY2025, which were entered at low costs.
With this in mind, the team has lowered its financing cost estimates for the REIT in FY2025 slightly, compared to its FY2024 forecast.
Priced ahead of fundamentals
At this point, the REIT will need to show “continued improvements” in its business operations to sustain its recent unit price surge.
“Although we believe the backdrop has become more favourable for Singapore REITs (S-REITs) given the 50 basis point (bps) reduction in the fed funds rate in September and expectations of more rate cuts to come, we believe Suntec REIT’s share price has run ahead of fundamentals,” the team writes.
In addition, the team expects to see a continued moderation in Singapore office market rents, which does not bode well for Suntec City Office. The building’s expiring rents in FY2025 are $10.05 per sq ft per month, which is higher than FY2024’s expiring rents of $9.47 per sq ft per month as at June 30. While Suntec’s Singapore retail operations should remain “resilient” and its convention business should see “further improvements”, the team notes that there are more uncertainties for its overseas properties.
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Based on its closing price of $1.37 as at Sept 19, Suntec REIT is trading at FY2024 and FY2025 distribution yields of 4.5% and 4.8% respectively. The REIT historically traded at a 10Y average forward distribution yield of 5.7%, the team adds.
In spite of its downgrade, the team has upped its fair value estimate, or target price, to $1.19 from $1.15 previously as it lowers its risk-free rate assumption by 50 bps to 2.50%.
As at 12.21pm, units in Suntec REIT are trading 3 cents lower or 2.26% down at $1.30.
