Suntec REIT (SGX:T82U) is a commercial REIT listed on the Singapore Exchange since December 2004, where its portfolio comprises of properties in the following countries:
Singapore:
- 100.0% interest in Suntec City Mall
- 55.7% interest in Suntec City Office Towers
- 66.3% interest in Suntec Singapore Convention and Exhibition Centre
- 33.3% interest in One Raffles Quay
- 33.3% in Marina Bay Financial Centre Tower 1 & 2, and Marina Bay Link Mall
Australia:
- 100.0% interest in 177 Pacific Highway in Sydney
- 100.0% interest in 21 Harris Street in Sydney
- 50.0% interest in Southgate Complex in Melbourne
- 50.0% interest in Olderfleet, 477 Collins Street in Melbourne
- 100.0% interest in 55 Currie Street in Adelaide
United Kingdom:
- 100.0% interest in The Minster Building in London
- 50.0% interest in Nova Properties in London
Early this morning (26 July), the commercial REIT have made available its results for the first half of the financial year ended 30 June 2023 (i.e., 1H FY2023), and in today’s post, I will be sharing my review of its latest financial results, portfolio occupancy and debt profile, and also its distribution payout to unitholders.
Let’s begin:
Financial Performance (1H FY2022 vs. 1H FY2023, and Q2 FY2022 vs. Q2 FY2023)
In this section, let us take a look at the REIT’s financial performance for the first half of the year (1H FY2022 vs. 1H FY2023), and then for the second quarter (Q2 FY2022 vs. Q2 FY2023):
1H FY2022 vs. 1H FY2023:
| 1H FY2022 | 1H FY2023 | % Variance | |
| Gross Revenue (S$’mil) | $203.5m | $224.3m | +10.2% |
| Property Operating Expenses (S$’mil) | $50.6m | $71.0m | +40.2% |
| Net Property Income (S$’mil) | $152.9m | $153.3m | +0.3% |
| Distributable Income to Unitholders (S$’mil) | $138.1m | $100.5m | -27.2% |
My Observations: The commercial REIT’s latest set of results for the first half of the year, compared to the same time period last year, was a largely negative one – with the only positive being a 10.2% improvement in its gross revenue, which can be attributed to higher contributions from Suntec City (where the retail mall recorded a higher retail revenue arising from higher occupancy, and the office recorded higher revenue due to higher occupancy and rent), Suntec Singapore (from more corporate events, conferences, and long-term licenses), and The Minster Building (from its full occupancy, with income guarantee over the vacant spaces and retail leases), offset by lower revenue from 177 Pacific Highway, 21 Harris Street, 55 Currie Street, and Olderfleet, 477 Collins Street due to the impact of the weaker Australian Dollar.
Property operating expenses saw a huge spike by 40.2%, leading to its net property income to inch up by just 0.3%.
Finally, its distributable income to unitholders fell by 27.2% due to higher financing costs, a weaker Australian Dollar and British Pounds against the Singapore Dollar, higher maintenance fund contribution, and lower contribution from joint venture (due to higher interest expense for MBFC properties and One Raffles Quay in Singapore, lower occupancy and higher interest expense in Southgate Complex).
Q2 FY2022 vs. Q2 FY2023:
| Q2 FY2022 | Q2 FY2023 | % Variance | |
| Gross Revenue (S$’mil) | $104.3m | $115.6m | +10.8% |
| Property Operating Expenses (S$’mil) | $25.7m | $38.6m | +49.9% |
| Net Property Income (S$’mil) | $78.6m | $77.0m | -2.0% |
| Distributable Income to Unitholders (S$’mil) | $75.2m | $56.0m | -25.6% |
My Observations: The REIT’s results for the 2nd quarter of FY2023 compared against the same time period last year (i.e., Q2 FY2022) was pretty much the same as its results for the first half of the year – where the only positive was in its gross revenue.
As a result of a huge spike in its property operating expenses, its net property income saw a 2.0% decline. Also, its distributable payout to unitholders also declined by 25.6%.
Portfolio Occupancy (Q1 FY2023 vs. Q2 FY2023)
Next, let us take a look at the commercial REIT’s portfolio occupancy by asset types in the various geographical locations.
In the table below, you will find a comparison of the statistics recorded in the current quarter under review (i.e., Q2 FY2023 ended 30 June 2023) against that recorded in the previous quarter (i.e., Q1 FY2023 ended 31 March 2023) to find out if it has continued to remain resilient, or it has weakened:
| Q1 FY2023 | Q2 FY2023 | |
| Singapore – Retail | 98.3% | 98.2% |
| Singapore – Office | 98.9% | 99.3% |
| Australia – Retail & Office | 97.3% | 96.6% |
| United Kingdom – Office | 100.0% | 100.0% |
My Observations: While occupancy rates in its Singapore Retail (due to a slight 0.2% dip in the occupancy rate of Suntec City Mall from 98.5% in Q1 FY2023 to 98.3% in Q2 FY2023) and Australia Retail & Office (due to a decline in occupancy in 21 Harris Street from 97.6% in Q1 FY2023 to 95.3% in Q2 FY2023, Southgate Complex from 90.1% in Q1 FY2023 to 88.6% in Q2 FY2023, and 55 Currie Street from 100.0% in Q1 FY2023 and 84.0% in Q2 FY2023) fell slightly, but in my opinion, the portfolio occupancy of its properties continue to remain very strong.
Positive rental reversions were recorded in new/renewed leases in Suntec City Office (+10.8% in Q2 FY2023), One Raffles Quay and MBFC Towers 1 & 2 (+10.3% in Q2 FY2023), Australian Retail & Office (+18.9% in 1H FY2023), as well as in Suntec City Mall (+18.2% in Q2 FY2023).
Debt Profile (Q1 FY2023 vs. Q2 FY2023)
If you have been following my reviews, you will know my concerns about the REIT’s debt profile where its aggregate leverage is too uncomfortably close to the regulatory limit of 45.0% (why 45.0% is because its interest coverage ratio have fallen below 2.5x.)
So, has its debt profile shown any improvements in the current quarter under review (i.e. Q2 FY2023 ended 30 June 2023), or has it continued to deteriorate when compared against the statistics recorded in the previous quarter 3 months ago (i.e., Q1 FY2023 ended 31 March 2023)?
Let us find out in the table below:
| Q1 FY2023 | Q2 FY2023 | |
| Aggregate Leverage (%) | 42.8% | 42.6% |
| Interest Coverage Ratio (times) | 2.2x | 2.1x |
| Average Term to Debt Maturity (years) | 2.6 years | 2.4 years |
| Average Cost of Debt (%) | 3.7% | 3.6% |
| % of Borrowings Hedged to Fixed Rates (%) | ~72% | ~63% |
My Observations: As far as its debt profile for the current quarter under review is concerned, it is largely a weaker one – of note is its ~63% of borrowings hedged to fixed rates, which is down by 9 percentage points from the previous quarter.
The REIT has just 2.3% (or S$100m) of its borrowings due for refinancing in the 2nd half of FY2023, 20.8% (or S$900m) of its borrowings due for refinancing in FY2024, 15.6% (or S$675m) of its borrowings due for refinancing in FY2025, and the remaining 61.3% (or S$2,647m) of its borrowings due for refinancing in FY2026 or later.
With a total of about 38.7% of its borrowings due for refinancing from now till end-2025, where interest rates are likely going to remain high till then (my view is that it will slowly come down to 4.0% in end-2024 and 3.0% in end-2025, and staying there for some time), higher borrowing cost is going to continue to impact its distribution payout to unitholders.
Another thing to note is that its aggregate leverage, at 42.6%, is already at the ceiling (where the REIT’s regulatory limit is 45.0%, due to its interest coverage ratio at below 2.5x), I do not foresee any further acquisition activities to happen.
Distribution Payout to Unitholders (Q2 FY2022 vs. Q2 FY2023)
Suntec REIT is one of the few remaining REITs where the management have continued to pay out a distribution to its unitholders once every quarter – and this was one of the reasons for my investment decision in it.
For the current quarter under review (i.e., Q2 FY2023), the REIT’s management have declared a distribution payout of 1.739 cents/unit – a 28.1% decline from its payout of 2.42 cents/unit in the same time period last year (i.e., Q2 FY2022).
Together with its payout of 1.737 cents/unit in Q1 FY2023, its payout for the first half of the financial year amounts to 3.476 cents/unit – again, this is 27.7% lower than its payout of 4.81 cents/unit in the first half of last year.
If you are a unitholder of the REIT, here are the following dates on its distribution payout to take note of:
Ex-Date: 02 August 2023
Record Date: 03 August 2023
Payout Date: 29 August 2023
CEO Chong Kee Hiong’s Comments & Outlook (from the REIT’s Press Release)
“Interest rates and energy costs are likely to remain high which will impact our distributable income for the rest of the year. We continue to explore potential divestment of our mature assets and strata office units at Suntec City to unlock value and strengthen our balance sheet.
Singapore Office Portfolio: Occupiers are expected to focus on cost management in view of global macroeconomic uncertainties. Office demand is expected to be muted with rents likely to plateau. Rent reversion for our Singapore Office Portfolio is expected to remain positive and revenue is likely to strengthen on the back of past twenty consecutive quarters of positive rent reversions.
Suntec City Mall: The recovery of Meetings, Incentives, Conventions and Exhibitions (“MICE”) events and the return of tourists will help boost mall traffic and tenant sales. While growth in retail sales is likely to slow, overall tenant sales is expected to remain above pre-COVID levels. Revenue from Suntec City Mall is expected to improve, underpinned by higher occupancy, rent and marcoms revenue.
Suntec Convention: The return of international headline events will continue to gather pace while the domestic market remains an important pillar for business recovery and growth. The easing of China’s travel restrictions is expected to have a positive impact to the convention business from the second half of 2023. Income contribution will remain impacted in 2023 with full recovery for Suntec Convention expected in 2024.
Australia Portfolio: Leasing momentum is expected to slow amidst macroeconomic uncertainties. Office vacancy in Sydney and Melbourne CBD is expected to increase from slowing demand and onstream supply. In Adelaide, significant new supply in the second half of 2023 is also expected to increase vacancy in the office market. Although rent reversion is expected to remain positive, revenue for the Australia Portfolio is likely to be impacted by leasing downtime and incentives/
United Kingdom Portfolio: Although economic challenges continue to impact the office market, good quality assets in prime locations remain sought after. Revenue for the UK Office Portfolio is expected to remain resilient, underpinned by high portfolio occupancy and long weighted average lease expiry.”
Closing Thoughts
The only bright spark in my opinion is its portfolio occupancy profile, where it is maintained at a very high level (above 90.0%), along with double-digit percentage rental reversions secured for new and/or renewed leases in a number of its properties – this will help to contribute to the REIT’s gross revenue positively in the coming quarters ahead.
As far as its financial performance goes, it was pretty much within my expectations, due to the REIT having a relatively low percentage of borrowings hedged to fixed rates, they will be impacted by rising borrowing costs.
Also, its debt profile continues to weaken, where its percentage of borrowings hedged to fixed rates fell to just 63%, meaning to say the REIT has a rather huge portion of borrowings unhedged (about 37%) and higher borrowing costs will impact its distribution payout to unitholders further.
With that, I have come to the end of my review of Suntec REIT’s results for the 1st half of FY2023. Do note that everything you have just read in this post is purely my own analysis which I am sharing for educational purposes only. Please do your own due diligence prior to making any buying or selling decisions.
Related Documents
Disclaimer: At the time of writing, I am a unitholder of Suntec REIT.
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