Company Reports

We retain our fair value estimate of SGD 1.38 per unit after Suntec REIT’s broadly in line first-quarter 2024 business update. Net property income was slightly below our expectation due to the stronger Singapore dollar against the Australian dollar, seasonally weaker convention business, and lower net property income margin. However, distribution per unit, or DPU, was still in line with our forecast due to higher joint venture income. After updating our exchange rate and debt assumptions, we lift 2024-26 DPU estimates by 1%-3%. Based on the current price, the trust trades at a 2024 distribution yield of 5.6% and is undervalued. However, we think the trust’s near-term earnings will be weighed down by vacancies in its Australia portfolio and high borrowing costs. For Singapore REITs, our top pick is Keppel REIT, which trades at a more attractive distribution yield of 6.8%.

Suntec REIT owns a SGD 12.2 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Dec. 31, 2023).

Suntec REIT’s second-half 2023 results were broadly in line with our expectations. Impressively, the trust got through 2023 without a rights issue despite concerns over its high gearing and weak credit metrics amid a rising interest rate environment. We think that credit should be given to its management for steering the trust through the challenging environment and delivering on its target to divest approximately SGD 100 million of assets in 2023 to shore up its balance sheet. That said, the trust still ended the year with a relatively high gearing of 42.3% and a low interest coverage ratio of 2 times. Management guided for another SGD 100 million of divestments and aims to take its gearing down to 40% and below in 2024. While we think SGD 100 million of divestments is achievable, we estimate that the trust needs to divest SGD 400 million worth of assets to bring its gearing below 40%. We expect the environment for divestments to improve in the second half of 2024 after the Federal Reserve starts to cut rates from March 2024 onward.

Suntec REIT owns a SGD 12.2 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Dec. 31, 2023).

Suntec REIT owns a SGD 12.2 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Sep. 30, 2023).

Suntec REIT’s third-quarter business update was broadly in line with our expectations. We updated our model to reflect the improved operating performance of its flagship asset and now assume no distribution top-up for 2024 and 2025 following management’s guidance. Consequently, our 2023 distribution per unit was increased by 0.6% while our 2024 and 2025 DPU forecasts were lowered by 10.6% and 2.8%, respectively. We retain our fair value estimate of SGD 1.38 per unit. Although the trust is slightly undervalued based on the last closing price, we currently prefer Keppel REIT for its attractive 2024 dividend yield of 7.3%.

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT management function. This move is unprecedented in Singapore, but we think it has positive implications for the industry. This event occurred because activist investor Quarz Capital led the push. As ESR Group holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only held a slight advantage going into the vote. Ultimately, we think ESR Group lost the vote because of concerns about potential conflicts of interest—ESR Group is the sponsor of more than one industrial REIT in Singapore—and the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.

Suntec REIT’s first-half 2023 earnings were in line with our expectations. While the recovery in tourism and convention events drove revenue growth slightly ahead of our expectations, this was largely offset by increased maintenance fund contribution to pay for higher utilities cost and lower contribution from joint ventures due to rising interest expenses and currency headwinds. The trust announced a small divestment of three strata units in its Suntec City Office portfolio. We estimate the trust will collect about SGD 30 million from the disposal and this can be used to pare down debt and relieve some gearing pressure. That said, as we believe the trust will need to repay about SGD 500 million of debt to reach a more comfortable gearing level of 40%, we think more disposals will be needed to ease investors’ concerns as to the trust’s high gearing level of 42.6% as of June 30, 2023. We retain our fair value estimate of SGD 1.38 but lower our 2023 forecast distribution per unit to SGD 0.0699 from SGD 0.0716, after cutting the net property income margins for Suntec City Mall and Convention Center to reflect the latest operating figures. This implies a 2023 dividend yield of 5.4% based on the last closing price of SGD 1.27. In our view, the trust is fairly valued, and we see greater upside in Keppel REIT currently.

Suntec REIT owns a SGD 12.3 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Dec. 31, 2022).

We are lowering our fair value estimate for Suntec REIT to SGD 1.38 from SGD 1.56 and raising our Morningstar Uncertainty Rating to High from Medium. In our view, the trust is facing higher refinancing risk on the back of deteriorating credit metrics in the current high interest-rate environment. The trust’s aggregate leverage ratio remains relatively lofty at 42.8%, while its adjusted interest coverage ratio has deteriorated further to 2.2 times this quarter from 2.4 times in the previous quarter. Although management is confident that the trust will not breach any bank covenants, we think that refinancing conditions are going to be more challenging for the trust, either through wider credit spreads or loan collaterals. As we expect the U.S. Federal Reserve to hold rates steady at 5%-5.25% for most of the rest of 2023, we think that pressure is building on management to either conduct a dilutive equity fund raise to shore up the trust’s balance sheet or sell its assets at a less ideal price.

Suntec REIT owns a SGD 12.3 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Dec. 31, 2022).

Suntec Real Estate Investment Trust ended 2022 strongly, with second-half revenue and net property income rising 16.9% and 14.6% year on year to SGD 223.7 million and SGD 162.8 million, respectively. Its crown jewel, Suntec City, led the way with a recovery of its retail mall and convention center coming at a slightly faster pace than we expected. However, the trust’s fourth-quarter distribution per unit declined by a wider 12.7% year on year to SGD 0.0199 even after including distribution top-ups of SGD 0.002 per unit. This is due to a higher cost of debt and higher proportion of asset-management fees taken in cash. Moving forward, management expects to continue taking 50% of its asset-management fees in cash and pause capital distribution until interest rates stabilize. We have updated our model accordingly and reduced our 2023 DPU estimate to SGD 0.0853 from SGD 0.0917. We also reduced our fair value estimate to SGD 1.56 per unit from SGD 1.66 after rolling forward our earnings model and fine-tuning our leasing and exit cap rate assumptions. This implies a 2023 distribution yield of 6.1% based on the current price. Although we think the trust currently trades at an attractive spread to the Singaporean 10-year government bond yield of 2.8%, our preference is for CapitaLand Integrated Commercial Trust, which we believe has better upside and risk-adjusted returns.

Suntec REIT owns a SGD 12.3 billion portfolio of income-producing office and retail assets across Singapore, Australia, and the United Kingdom (as of Dec. 31, 2022).

After a few consecutive quarters of encouraging performances, Suntec REIT’s good run was met with currency and interest rate headwinds that collectively hit its third-quarter distribution per unit, or DPU. The trust’s third-quarter DPU fell 6.6% year on year to SGD 0.02084 even after including distribution top-ups of SGD 0.002 per unit. We reduce our fair value estimate to SGD 1.66 from SGD 1.78 after revising our model to capture the higher-than-expected near-term cost of debt, updating the latest currency exchange rates and fine-tuning our leasing and exit cap rate assumptions. As a result, our 2023 DPU is reduced to SGD 0.0917 per unit from SGD 0.1004. This implies a 2023 distribution yield of 6.5% based on the current price. Although we think the trust currently trades at an attractive spread to the Singapore 10-year government bond yield of 3.5%, our preference is for Singapore-centric CapitaLand Integrated Commercial Trust, or CICT, that we believe has better upside and risk adjusted returns.

Suntec REIT owns a SGD 12.2 billion portfolio of income producing office and retail assets across Singapore, Australia and the United Kingdom (as of March 31, 2022).

Bolstered by the substantial easing of COVID-19 restrictions since end-April, Suntec REIT ended the first half of 2022 with a strong set of results. Notably, second-quarter 2022 rental reversion for its retail portfolio turned to a positive 2.7%, driven by Suntec City Mall, while its Singapore office portfolio registered its 16th consecutive quarter of positive rental reversion at 5.7%. Gross revenue and net property income jumped 22% and 36% year on year to SGD 203.5 million and SGD 152.9 million, respectively, making up 49% and 51% of our full-year estimate. Although we expect some upward pressure on yields due to the rising interest rate environment, we have already factored in a 50-basis-point and 100-basis-point yield expansion on the exit cap rate for Suntec REIT’s office and retail assets, respectively. Based on current price, Suntec REIT trades at a forward yield of 6.0%, which we believe is an attractive spread to the Singapore 10-Year Government Bond Yield of 2.7%.

Suntec REIT’s first-quarter 2022 results showed some good signs of recovery, in line with our expectations. Notably, Suntec City Mall clocked in higher occupancy rates and reversed seven consecutive quarters of negative rental reversions to register a flat 0% rental reversion, while its Singapore office portfolio registered its 15th consecutive positive rental reversion of 5.3%. In addition, no rental rebate was provided to any tenants for the quarter and management does not expect to provide rebates for the rest of the year. Following the substantial easing of COVID-19 restrictions by the end of April 2022, we think that the returning workforce and higher group sizes will boost shopper traffic and tenant sales for the rest of the year. As we think that the worst is over for the mall, we have removed our one-off rental rebate assumption and estimate a low positive rental reversion (from negative rental reversion previously) for the rest of the year. Management also decided to reward its unitholders for riding out the COVID-19 pandemic together with the resumption of its capital distribution, now that it sees less uncertainty from the pandemic going forward. This higher distribution is offset by a shift toward receiving 50% of its management fees in cash as opposed to 74% historically based on our calculation. After updating our model to reflect these changes, our estimated fiscal 2022 distribution per unit, or DPU, is raised by 12.3% to SGD 0.0979, implying a forward dividend yield of 5.3% at current prices.

Suntec REIT owns a SGD 12.2 billion portfolio of income producing office and retail assets across Singapore, Australia and the United Kingdom (as of March 31, 2022).

We are transferring coverage of Suntec Real Estate Investment Trust, or Suntec REIT, with no-moat and stable moat trend ratings. We have increased our fair value estimate to SGD 1.78 per unit from SGD 1.74 after rolling forward our earnings model and updating our model assumptions to account for the improved outlook on office rents in Singapore. This is partly offset by higher near-term cost of debt from future interest rates hikes. Our fair value estimates implies a forward distribution yield of 4.8% and a price/book ratio of 0.9 times in 2022. In our view, Suntec REIT is slightly undervalued currently with near-term growth driven by the Minster Building acquired in July 2021.

Suntec REIT is a commercial REIT that focuses on offices and, to a lesser extent, retail properties. The trust’s flagship asset, Suntec City, which constitutes more than half of its total property portfolio, consists of five office towers, one of Singapore’s largest shopping malls, and a convention and exhibition center. Despite its location in the central area of Singapore with two subway stations connecting to the property, rental rates have been below the market average. This is because Suntec City is north of the Singapore River, while the core central business district, or CBD, is concentrated in the south, resulting in below-average grade A office market rental for its offices. As for the retail mall, the lower rental rates are mainly attributed to competition from malls nearby; its location, as it is not surrounded by residential areas and is far away from the main shopping district; and its odd shape, resulting in difficulty in navigating around the mall.