Suntec REIT: Standing firm in Singapore
- 1H24 DPU of 3.042Scts in line with our projections; weighed down by the absence of capital distribution
- Singapore portfolio continues to deliver while performance in Australia remains challenging
- Gearing and borrowing costs remain stable, and SUN will likely be an early beneficiary of interest rate cuts
- Maintain HOLD with unchanged TP of SGD1.15
(+) Revenues and JV income were up y/y
- Revenues were up 1.2% y/y to SGD226.9mn, mainly due to better performance from Suntec City Office, Mall, and Convention
- Partially offset by the lower contribution from 55 Currie Street and 177 Pacific Highway in Australia
- Also partially offset by lower contribution from The Minster Building in the UK
- JV income was up 7.6% y/y to SGD49.7mn, again mainly due to the stronger performance of its Singapore portfolio
- Better performance at MBFC properties, One Raffles Quay, as well as higher contribution from Nova Properties (in London)
- This was partially offset by weaker performance from Southgate Complex (in Melbourne), and the weaker AUD against SGD
(+) 1H24 DPU of 3.042Scts is in line with our projections
- 1H24 DPU makes up c.49% of our FY24 projections
- 2Q24 DPU was up c.1.3% q/q, mainly due to improved performance at the Singapore properties
- DPU, however, was down 12.5% y/y, mainly due to the absence of capital distribution, higher financing costs, and lower occupancies at 55 Currie Street and The Minster Building
- 5mn in capital distribution was paid out in 1H23; excluding this, 1H24 DPU would have only been c.1.2% lower y/y
- Financing costs increased by SGD6.6mn y/y due to higher borrowing costs
(+) Overall portfolio occupancy remains healthy
- Office portfolio remained flat q/q at 95.1%
- Retail portfolio reported a 0.1ppt decline q/q to 95.4%
- Minimal lease expiries for the rest of FY24
- Majority of remaining expiries in FY24 are from Singapore office (5.3% of NLA) and Singapore retail (5.2% of NLA)
- We will be watching out for lease expiries in FY25, with the bulk also coming from SUN’s Singapore portfolio
- 9% of Singapore office NLA
- 9% of Singapore retail NLA
(+) Strong showing from the Singapore properties despite marginal dip in occupancy rates
- Slight dip in overall Singapore office portfolio but largely offset by Suntec City offices
- Suntec City offices are currently 100% occupied (vs. 99.4% in 1Q24)
- 8ppt drop in the occupancy rate at MBFC Towers 1 & 2
- Singapore retail portfolio also saw a very slight 0.2ppt decline in occupancy
- Both Suntec City Mall and Marina Bay Link Mall reported a marginal decline in occupancy rates
- Despite this, positive rental reversions made up for the slight decline in occupancy
- Singapore office portfolio reported +7.9% in rental reversions
- Suntec City Mall reported a very solid +20.8% in rental reversions
- Office rents in Singapore still holding firm and continue to rise despite the completion of IOI Central Boulevard
- We understand that the landlord continues to hold firm on asking rents
- 45% pre-committed, with an additional 20% that could be signed soon
- Retail sales could see further improvement with the continued recovery of tourism and a boost in MICE and business travel
(-) Australian portfolio continues to remain a drag on earnings
- Despite a slight improvement in occupancy rates and continued positive rental reversions, earnings from the Australian portfolio weakened
- Slight 0.2 ppt increase in portfolio occupancy rates q/q
- +13.4% rental reversion in 1H24
- Weaker earnings from Australia, mainly due to higher incentives and a weaker AUD vs. the SGD
- New supply coming online will also continue to put downward pressure on occupancy rates
- Could also see further valuation weakness at the end of the year: between 25-50bps downside
(+) UK portfolio remains flat q/q
- Overall occupancy remains flat at 95.5% q/q
- Occupancy and rental rates in Central London are expected to improve due to tight supply
- Expect all vacancies in The Minster Building to be backfilled in 2H24, but income contribution will only commence in FY25 due to rent-free period
- Rental incentives remain elevated in the UK
(+/-) All-in financing costs remained relatively stable q/q
- All-in financing costs saw a 1bps improvement q/q to 4.02%, with the next debt maturity only in FY25
- Overall cost of borrowings could inch up to c.4.2% by the year-end as more interest rate swaps roll off
- MAS leverage inched up 1bps to 42.3% (vs. 42.2% in 1Q24), while adjusted ICR remained flat at 1.9x
- Debt ratio ((D+P)/A) remained relatively stable at 41.3%
- With c.55% of loans hedged to fixed rates, SUN could be an early beneficiary of any interest rate cuts
- However, we continue to keep a close eye on the SGD200mn in perpetual securities that will be due for a reset on 27 October 2025
Our thoughts
Although overall operating and capital management metrics look to have somewhat stabilised, we believe SUN’s Australian portfolio will remain a drag on earnings, especially 55 Currie Street and Southgate Complex. An increase in the delivery of new supply, as well as elevated incentives, will continue to weigh down its Australian portfolio. The Singapore portfolio remains the star performer for SUN, but a tapering off in positive rental reversions expected for the Singapore office portfolio could lead to a slowdown in organic growth.
SUN’s capital management metrics remained stable and look set to improve in 2H24 with the SGD31.5mn in divestments of strata office units (27% above book value), but we are watching out for the more than SGD630mn in debt set to mature in FY25, coupled with the SGD200mn perpetual securities (initial spread of 3.30%) that are due for a reset. We understand that management continues to be on the lookout to divest older and lower yielding assets to help manage gearing.
Lastly, with expectations of a slowdown in the rental growth for Singapore office, we remain watchful of the upcoming lease expiries in FY25.
Given our cautious stance, we will be maintaining our HOLD recommendation with a TP of SGD1.15.
FY Dec | 1H2023 | 2H2023 | 1H2024 | % chg y/y | % chg h/h |
Gross revenue | 224 | 238 | 227 | 1.2 | (4.8) |
Property expenses | (71.0) | (78.6) | (75.9) | 6.9 | (3.4) |
Net Property Income | 153 | 160 | 151 | (1.5) | (5.5) |
Other Operating expenses | (31.6) | (33.1) | (33.2) | 5.2 | 0.2 |
Other Non Opg (Exp)/Inc | 0.0 | (1.6) | 8.62 | - | - |
Associates & JV Inc | 37.3 | (1.3) | 41.4 | 11.1 | - |
Net Interest (Exp)/Inc | (73.4) | (78.5) | (78.4) | (6.7) | 0.2 |
Exceptional Gain/(Loss) | (7.3) | (29.1) | 5.37 | - | - |
Net Income | 78.3 | 16.2 | 94.8 | 21.2 | 486.3 |
Tax | (7.5) | (0.4) | (5.9) | (22.2) | 1,241.9 |
Minority Interest | 0.81 | (11.8) | (0.7) | - | (93.9) |
Net Income after Tax | 71.5 | 3.99 | 88.2 | 23.3 | 2,114.4 |
Total Return | 72.1 | 113 | 88.2 | 22.4 | (22.1) |
Non-tax deductible Items | 23.8 | (11.4) | 7.42 | (68.9) | - |
Net Inc available for Dist. | 101 | 106 | 88.7 | (11.8) | (16.6) |
Ratio (%) |
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Net Prop Inc Margin | 68.3 | 67.0 | 66.6 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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