RAISING capital via a rights issue to address gearing levels is the &ldquo last priority&rdquo for Suntec Reit, Chong Kee Hiong, chief executive of the manager, said on Monday (Oct 23).

 

&ldquo In this climate, getting unitholders to fork out more money just to make the balance sheet stronger, I don&rsquo t think is the right thing to do,&rdquo he said. &ldquo We are still focused on divestments, and the market is still there for divestment.&rdquo

 

The real estate investment trust (Reit) manager is looking to divest more strata units in Suntec office towers, and it aims for S$100 million in such divestments this year.

 

Chong said the Reit is close to 40 per cent of its target so far. Suntec Reit sold three units in the third quarter, at prices over S$3,000 per square foot (psf) &ndash higher than its book value of S$2,500 psf.

 

Chong noted that the Reit has strata-titled units in Suntec Towers 4 and 5, but they do not intend to sell these yet.

 

&ldquo We have enough smaller units in Towers 1, 2 and 3,&rdquo he said, noting that the strata units in these three towers would give the Reit around S$1 billion worth of assets to divest.

 

He added that the Reit would sell units if there is buying interest, but it would not want to depress the market, and would look to sell north of S$3,000 psf.

 

&ldquo We are not going to sell our assets cheap,&rdquo he said. &ldquo The market will come back, so it&rsquo s a matter of how much we hold on until the market comes back.&rdquo

 

Chong said Suntec Reit was exploring a sale of some Australian assets, but the market was not conducive. However, there is still demand for strata units, especially from owner-occupiers.

 

&ldquo By selling strata, it&rsquo s basically buying us time until the market recovers, where we can go back to selling our mature assets,&rdquo he said, adding that any divestment proceeds would be used to pay down debt.

 

Chong said the manager is currently confident the Reit would not cross the 45 per cent aggregate leverage ratio (ALR) threshold or breach its interest coverage ratio covenants.

 

Suntec Reit reported last Friday (Oct 20) that gearing as at Sep 30, 2023, climbed to 42.7 per cent, up slightly from 42.6 per cent three months earlier.

 

Chong said he expects year-end valuations for the Reit&rsquo s Singapore assets to hold, but Australia and UK asset values would likely soften year on year.

 

&ldquo On the whole, we expect the impact on ALR to be about 100 basis points up,&rdquo he said.

 

But the Reit&rsquo s expected divestment of S$100 million in strata assets this year would bring gearing down by around 100 basis points as well. This would mean that ALR should remain around the current levels.

 

The Reit reported last Friday that distribution per unit (DPU) for the third quarter fell 14 per cent on year to S$0.01793. This comprised S$0.01595 DPU from operations and S$0.00198 DPU from capital.

 

Suntec Reit warned of softer office demand in Singapore as tenants look to contain costs. While rent reversion is still expected to be positive, they may not be in the double digits.

 

Chong said there are currently no plans for any capital top-up for 2024. He noted that the decline in operating DPU is mainly due to high interest costs, but the Reit&rsquo s operating statistics in office, retail and convention have remained resilient.

 

&ldquo If the high interest costs remain, I think DPU will be muted compared to 2022,&rdquo Chong said.

 

Suntec REIT has reported a distribution per unit (DPU) of 1.793 cents for the 3QFY2023 ended Sept 30. The quarter&rsquo s DPU is down by 14.0% y-o-y but up by 3.1% q-o-q. Unitholders will receive their distributions on Nov 29.

 

Similarly, the REIT&rsquo s 3QFY2023 distributable income of $52.0 million fell by 13.3% y-o-y but rose by 3.6% q-o-q.

 

Distributable income from operations fell by 14.8% y-o-y to $46.2 million. DPU from its operations fell by 15.3% y-o-y to 1.595 cents.

 

According to the REIT manager, the REIT&rsquo s DPU was affected by higher financing costs and the weaker Australian dollar (AUD) against the Singapore dollar (SGD). These factors were, however, mitigated by an improvement in the operational performance of the REIT&rsquo s office, retail and convention properties.

 

Gross revenue for the 3QFY2023 rose by 15.0% y-o-y to $123.4 million while net property income (NPI) rose by 9.7% y-o-y to $84.6 million. The higher figures were due to higher contributions from Suntec City Office, Suntec City Mall and Suntec Convention as well as The Minster Building in London. These were offset by higher maintenance fund contribution and commencement of the REIT&rsquo s sinking fund contribution in 2023 and lower contribution from its Australian portfolio.

 

Joint venture (JV) income fell by 20.4% y-o-y to $23.8 million as the stronger operating performance at its properties in Marina Bay Financial Centre (MBFC) and One Raffles Quay were offset by higher interest expenses.

 

Rent-free incentives for lease renewals, higher rent relief for retail tenants and higher interest expense at Southgate Complex in Melbourne, as well as the weaker AUD impacted the REIT&rsquo s JV income negatively too.

 

During the quarter, the REIT&rsquo s office portfolio saw a committed occupancy rate of 97.4% while its retail portfolio had a committed occupancy rate of 97.9%.

 

Portfolio weighted average lease expiry (WALE) for its office assets stood at 4.3 years while its retail assets&rsquo WALE stood at 2.2 years.

 

As at Sept 30, Suntec REIT&rsquo s aggregate leverage ratio increased by 0.1 percentage points q-o-q to 42.7%. Its adjusted interest coverage ratio (ICR) fell by 0.1x to 2.0x.

 

&ldquo The operating performance of our portfolio improved, in particular, the convention business whose recovery is ahead of schedule. However, high interest rates and energy costs continue to impact our distribution income. Suntec REIT&rsquo s continual improvement in the areas of environmental, social and governance (ESG) reflects our commitment to growing our business responsibly while delivering long-term value to our stakeholders,&rdquo says Chong Kee Hiong, CEO of the manager.

 

Suntec REIT attained the highest GRESB 5 Star rating for the fourth consecutive year since its inaugural participation in 2020. Suntec REIT was also awarded an &lsquo A&rsquo for its public disclosure. GRESB stands for Global Real Estate Sustainability Benchmark.

 

Looking ahead, the REIT manager believes that Singapore&rsquo s MICE (or meetings, incentives, conferences and exhibitions) industry will continue to drive and benefit the country&rsquo s tourism recovery.

 

&ldquo The convention business recovery is ahead of schedule and future growth will be driven by international, domestic and consumer events,&rdquo says the REIT manager.

 

In Australia, the manager is expecting to see a slowdown in leasing momentum amid macroeconomic uncertainties. Office vacancies in Sydney&rsquo s and Melbourne&rsquo s central business districts (CBD) are expected to increase from slowing demand and onstream supply. In Adelaide, significant new supply in the fourth quarter of 2023 is also expected to increase vacancy in the office market. A

 

&ldquo Although the portfolio occupancy is expected to remain above market level, revenue for the Australia portfolio is likely to be lower due to leasing downtime and incentives,&rdquo says the manager.

 

In the UK, the REIT manager notes that good quality assets in prime locations are still sought after despite the economic challenging impacting the UK office market. That said, it expects revenue for its UK portfolio to be impacted by leasing downtime.