Gross revenue for Suntec Reit, which has Suntec City in its portfolio, increased by 10.2 per cent year on year to S$224.3 million for the half-year period. 

SUNTEC Real Estate Investment Trust : T82U -2.27% (Reit)&rsquo s distribution per unit (DPU) fell 27.7 per cent to S$0.03476 for its first half ended Jun 30, from S$0.04810 in the same period a year earlier.

 

Although the Reit&rsquo s operational performance continued to improve, higher financing costs and a weaker Australian dollar and pound weighed on distributable income, the Reit&rsquo s manager said on Wednesday (Jul 26).

 

Gross revenue was up 10.2 per cent to S$224.3 million for the half-year period, from S$203.5 million in the year-earlier period. This was mainly due to higher revenue from Suntec City, Suntec Singapore and The Minster Building.

 

However, it was partially offset by a drop in revenue from Australian properties 177 Pacific Highway, 21 Harris Street, 55 Currie Street and Olderfleet, 477 Collins Street, as a result of a weaker Australian dollar.

 

Net property income grew 0.3 per cent on the year to S$153.3 million for the half year, from S$152.9 million.

 

Distributable income declined 27.2 per cent year on year to S$100.5 million, from S$138.1 million previously.

 

The distribution will be paid out on or about Aug 29, after books closure on Aug 3.

 

Chong Kee Hiong, chief executive of the Reit&rsquo s manager, said interest rates and energy costs are likely to remain high, which will impact distributable income for the rest of the year.

 

However, he added that the Reit will continue to explore potential divestment of its mature assets and strata office units at Suntec City to unlock value and strengthen its balance sheet.

 

The weighted average lease expiry (Wale) for the Reit&rsquo s office portfolio stands at 4.3 years, while its retail portfolio has a Wale of 2.2 years.

 

The manager said that revenue from its Suntec City Mall is likely to strengthen on higher occupancy, rent and marketing communications revenue.

 

It expects its UK properties to remain resilient, underpinned by high portfolio occupancy and long Wale.

 

Meanwhile revenue from its Australian office portfolio is likely to be impacted by leasing downtime and incentives despite positive rent reversion. Retail rents also continued to show weakness, registering negative growth in Q1 2023.

CITI Research has downgraded Suntec Real Estate Investment Trust : T82U -0.76% (Suntec Reit) to &ldquo sell&rdquo from &ldquo neutral&rdquo , and slashed its target price to S$1.13 from S$1.41 in anticipation of a potential downcycle in the office property market.

 

In a report on Wednesday (May 31), analyst Brandon Lee said the revised target price represents 0.53 times the price-to-book ratio, which is in line with his bottom-end estimates of 0.5 times to 0.9 times for past office downcycles. 

 

This comes after the research house lowered its distribution per unit estimates for the Reit by 4 per cent for FY2023, 7 per cent for FY2024 and 2.4 per cent for FY2025 to account for higher debt costs, lower office rents and weaker contribution from the Reit&rsquo s Singapore assets.  

 

For H2 2023, Citi has projected a rental downcycle and said it expects an industry downturn to impact Suntec Reit negatively, given that it derives 44 per cent of net property income from this sector. 

 

Factors cited by Lee include falling office rentals, a large supply of Grade A office stock and rising &ldquo shadow space&rdquo &ndash or space that is underutilised though it remains leased out. 

 

He also foresees subdued demand due to weak economic growth, and said ongoing downsizing in the technology and finance sectors could affect the Reit&rsquo s performance as its portfolio is largely focused on office and retail assets. 

 

Lee further noted recent office transactions of the Reit&rsquo s portfolio in Australia were concluded with falling selling prices as a result of higher interest rates. This jump in interest rates was also observed for the UK&rsquo s portfolio, which raised the capitalisation rates for the property trust further.

 

Despite this, Lee is optimistic that Singapore&rsquo s portfolio would perform better as the country&rsquo s cap rate movement is more muted. 

 

Based on his observations of Suntec Reit&rsquo s latest transactions, he estimates a cap rate of 3 per cent against Suntec Reit&rsquo s overall rate of 3.4 per cent.

 

He nonetheless remains cautious of Suntec Reit&rsquo s gearing ratio which currently stands at 42 per cent the highest among its peers under Citi&rsquo s coverage.  

 

Selling its &ldquo two best assets&rdquo in Australia &ndash 477 Collins Street and 177 Pacific Highway &ndash would be the &ldquo best way&rdquo for the Reit to raise capital to improve its gearing, in Lee&rsquo s view. 

 

The analyst, however, cautioned that additional equity would be required if the Reit does not sell any assets before its December 2023 revaluation exercise, which would in turn threaten to offset the trust&rsquo s ongoing recovery in its Singapore&rsquo s retail and convention businesses. 

 

Suntec Real Estate Investment Trust&rsquo s (Suntec Reit) distribution per unit (DPU) fell by 9.7 per cent to S$0.04074 for the second half of 2022 ended December, from S$0.04512 a year ago. 

 

Higher interest expense for the period resulted in a 27.8 per cent rise in finance costs for the Reit, its manager said in a regulatory filing on Friday (Jan 20).

 

Gross revenue was up 16.9 per cent to S$223.7 million for the half-year period, from S$191.3 million a year ago. Net property income grew 14.7 per cent to S$162.8 million from S$142 million in H2 FY2021.

 

The Reit&rsquo s Singapore and United Kingdom portfolios remained resilient, while contribution from the Australia portfolio was lower year on year due to leasing downtime and absence of surrender fee received a year ago.

 

Distributable income in H2 slipped 9 per cent to S$117.3 million, from S$129 million a year ago.

 

For the full year ended Dec 31, 2022, DPU was up 2.5 per cent to S$0.08884 from S$0.08666 a year ago. The Reit&rsquo s manager attributed this to capital distribution of S$23.0 million, with improvement in distributable income from better operating performance being eroded by higher financing costs.

 

Distributable income for FY2022 rose 3.4 per cent to S$255.5 million from S$247.2 million a year ago.

 

The Reit&rsquo s gross revenue rose 19.3 per cent to S$427.3 million from S$358.1 million in the year-ago period, while net property income grew 24 per cent to S$315.8 million from S$254.6 million from a year ago.

 

Chong Kee Hiong, chief executiveof the manager, expects continued rising interest rates, weaker exchange rates and higher energy costs to erode operational gains and impact distributions &ldquo significantly&rdquo in the near term. This is despite the manager increasing the Reit&rsquo s fixed interest rate borrowing and foreign currency income hedge. 

 

&ldquo We are also actively looking at the potential divestment of our mature assets to strengthen our balance sheet,&rdquo he added.

RHB Research downgraded its call on Suntec Real Estate Investment Trust (Reit) : T82U -2.19% to &ldquo neutral&rdquo from &ldquo buy&rdquo as it expects the Reit to be impacted by slowing growth and rising rates in the technology sector.

 

The research house slashed its target price from S$1.70 to S$1.47 after lowering FY2023 to FY2024 distribution per unit estimates by 12 per cent, upon factoring in adjusted occupancy and rental growth, higher financing costs, and assuming higher fees in cash.

 

On Tuesday (Jan 10), analyst Vijay Natarajan noted that while the Reit&rsquo s valuation remains &ldquo inexpensive&rdquo at about a 35 per cent discount to its book value, he sees limited catalysts ahead. 

 

While the analyst observed a slowdown in office demand drivers, he said Suntec City Mall&rsquo s performance should remain &ldquo relatively steady&rdquo with the convention segment expected to rebound strongly in FY2023.

 

Natarajan anticipates divestments in the near term to lower Suntec Reit&rsquo s gearing, while helping to manage interest cost pressures. In his view, the Reit&rsquo s gearing of 43.1 per cent is on the high side versus peers and has been a key investor concern.

 

Despite a weaker UK economic outlook, Natarajan expects negative impacts on the Reit&rsquo s overseas portfolio to be partially offset by its Singapore assets, which have seen strong operational improvements. Overseas assets could also be mitigated by long leases with no significant lease expiries or breaks until 2025, he added. 

 

Similarly, for its Australian assets, the Reit has already secured lease commitments for more than half of 2023 expiring leases.

 

Natarajan also noted that the valuation of the Reit&rsquo s portfolio is unlikely to experience significant reductions as at end-2023, with the gearing ratio to be maintained below 45 per cent.

 

There is potential for Suntec Reit to divest assets in Australia or pare down its stake in Singapore to lower debt, he added.

 

&ldquo On the foreign exchange (FX) front, it has hedged 61 per cent of its overseas derived income, thereby limiting FX impact.&rdquo

The manager of Suntec REIT has announced that the REIT&rsquo s trustee, HSBC Institutional Trust Services (Singapore), has entered into a $400 million sustainability-linked facility agreement with various banks on Dec 20.

 

The loan was made to refinance part of the REIT&rsquo s outstanding borrowings and for general working capital purposes.

 

The aggregate level of facilities which may be affected by a breach, which includes facilities which will be affected as a result of cross defaults, is around $4.51 billion as at Dec 20 should the REIT manager cease to be an affiliate of ARA Asset Management. Should the REIT manager cease to be the manager of Suntec REIT and the replacement or substitute manager is not appointed according to the terms of the trust deed, as well as other conditions, it could be constituted as an event of default as well.

On Dec 13, Suntec Reit : T82U 0% substantial shareholder Celine Tang acquired 1,780,000 units at S$1.40 per unit. With a consideration of S$2,492,000, this increased her direct interest in the diversified Reit from 7.98 per cent to 8.05 per cent. This followed on from Tang increasing her direct interest above the 7 per cent threshold on Nov 7, and above the 6 per cent threshold on Aug 19.

 

As of Sep 30, Suntec Reit maintained S$12.0 billion of assets under management across high quality office assets, complemented by retail and convention components. These properties are in Singapore, and key cities in Australia and in London, United Kingdom. In Singapore, Suntec Reit holds Suntec City, a 66.3 per cent interest in Suntec Singapore Convention & Exhibition Centre, a one-third interest in One Raffles Quay and a one-third interest in Marina Bay Financial Centre Towers 1 and 2 and the Marina Bay Link Mall.