To The Moon

$SUNTEC REAL ESTATE INV TRUST(T82U.SI)$ 

Suntec REIT (SUN) reported its 4Q22 result this morning. Suntec REIT's DPU decreased by 4.5% compared to the previous quarter and 12.7% compared to the same quarter the previous year, bringing the full year DPU to 8.884 cents, a 2.5% increase from the previous year. This is relatively in line with street’s expectations.

Due to rising financing costs in the fourth quarter and a large portion of debt set to be refinanced in the next fiscal year, it is expected that borrowing costs will continue to increase and DPU may decrease. SUN's interest coverage ratio has also decreased to 2.4x, indicating a lower limit for their debt-to-equity ratio due to MAS regulatory restrictions on gearing. The REIT may need to sell assets or do a dilutive EFR to manage financial risks. SUN has also stated that distributions may be significantly impacted in the near future due to rising rates, currency fluctuations and increased energy costs.

Weak earnings outlook

Escaped Manulife US REIT’s devaluation fate

Luckily, Suntec REIT did not face the same devaluation problem we saw in Manulife US REIT’s devaluation. Overall portfolio valuations remained stable at S$11.8 billion, with increases in valuations for Singapore office, retail, and convention assets offset by revaluation losses in Australia and the UK.

As a result, the gearing ratio improved to 42.4%, a decrease of 0.7% from the previous quarter and 1.3% from the previous year.

SG asset fundamentas improved

Rental reversion for Singapore offices improved by 10.6% in the fourth quarter of 2022, compared to 6.8% for the entire year. The rent for specific buildings such as One Raffles Quay and Marina Bay Financial Center improved by 9.1%. Rental reversion for Suntec Mall also improved by 9.9% in the fourth quarter of 2022 and 4.8% for the full year.

The REIT expects that rent for offices will continue to increase, but at a slower pace. Additionally, the company expects slower growth in the tenants’ sales in 2023, with tenant sales levels at 117% of pre-COVID levels in the fourth quarter of 2022.

Tenant sales rebounded, but growth capped

Financing cost will be a huge drag on DPU

All-in FY22 financing costs rose to 2.94% (FY21: 2.35%), with 4Q22 at 3.6%. SUN is the most affected by the rapid rise in floating rates, with a 9.4% impact to DPU for every 100 bps change in floating rates. With almost S$1bn (21%) of debt due for refinancing in FY23, I am pretty sure the impact of higher rates will more than offsetting higher office rents and retail recovery. 

Huge refinancing adds to risk

Once again, the risk of fire sale or dilutive equity fund raising will continue for Suntec REIT unitholders. Stay safe Tigers!

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