Suntec REIT’s unit price (SGX: T82U) has fallen sharply this year as investors worry the REIT’s debt level is nearing its regulatory limit. The REIT recently reported its latest quarterly financial results. How were Suntec REIT’s Q3 2023 results? Let’s dive in.
Financial Results
Here we summarize Suntec REIT Q3 2023 financial results with the same quarter last year:
| Q3 2023 | Q3 2022 | Change | |
|---|---|---|---|
| Gross Revenue | $123.4m | $107.3m | +15.0% |
| Operating Expenses | ($38.8m) | ($30.2m) | +28.5% |
| Net Property Income | $84.6m | $77.1m | +9.7% |
| Distributable Income | $52.0m | $60.0m | -13.3% |
At a glance, we see both good and bad news. The results are mixed: revenue and income increased, but expenses rose sharply, offsetting the gains in distributable income.
Revenue climbed by 15% to $123.4m this last quarter, driven by higher contributions from its crown jewel properties: Suntec City Office, Suntec City Mall, and Suntec Convention.
Operating expenses jumped 28.5% to $38.8m, driven by a higher maintenance fund contribution and the sinking fund’s commencement in 2023.
Higher expenses, refinancing costs, and a weaker AUD relative to SGD reduced distributable income by 13.3% to $52.0m.
This result is largely expected, with DPU declining due to higher costs and refinancing despite higher income. With the higher interest rate environment likely to continue in 2024 and beyond, we may see further pressure on the Suntec REIT’s DPUs going forward.
Debt Profile
In our opinion, Suntec REIT’s high debt load is the big elephant in the room. With higher interest rates expected to last longer, Suntec REIT’s relatively high debt level is a concern for many unitholders. Let’s see whether or not its debt profile has improved:
| Q3 2023 | Q2 2023 | Change | |
|---|---|---|---|
| Aggregate Leverage Ratio | 42.7% | 42.6% | +0.1% |
| Adjusted ICR | 2.0x | 2.1x | -0.1x |
| All-in Financing Cost | 3.78% | 3.64% | +0.14% |
| Weighted Average Interest Maturity | 2.25 years | 2.40 years | -0.15 years |
| Interest Rate Borrowings (fixed) | 55% | 58% | -3% |
From the summary table above, Suntec REIT’s debt profile has unfortunately weakened further last quarter. The aggregate leverage ratio rose again to 42.7%, alarmingly close to the regulatory limit of 45%. The adjusted ICR also declined further to 2.0x. Because Suntec REIT’s adjusted ICR is less than 2.5x, the regulatory limit for its aggregate leverage ratio is only 45%.
We also see that interest-rate borrowing hedged to a fixed rate declined again to 55% (from 58% in the previous quarter). This makes the REIT susceptible to an increase in interest rates.
Debt Maturity Distribution
The chart above summarizes the amount and percentage of debt that needs to be refinanced by year. The good news is that no refinancing is needed this year. The bad news is that 20.93% of debt needs refinancing next year and 15.47% in 2025. We are closely watching the next two years as we prepare for interest rates to remain high for an extended period.
If this high-interest-rate environment persists in 2024 and 2025, we may see Suntec REIT’s refinancing costs rise further and put pressure on its DPU. With the debt profile close to the regulatory limit, higher borrowing costs may raise concerns for investors. Suntec REIT may need to divest some portfolio holdings or raise capital via rights issues to strengthen its balance sheet.
Portfolio Occupancy
Here is the summary of Suntec REIT’s occupancy rate:
| Q3 2023 | Q2 2023 | |
|---|---|---|
| Overall Office Portfolio | 97.4% | 98.6% |
| Overall Retail Portfolio | 97.9% | 97.5% |
| Overall Office WALE | 4.3 years | 4.3 years |
| Overall Retail WALE | 2.2 years | 2.2 years |
| Singapore Office Portfolio | 99.5% | 99.3% |
| Singapore Retail Portfolio | 98.6% | 98.2% |
| Australia Portfolio | 95.4% | 96.6% |
| UK Portfolio | 93.5% | 100% |
Overall, we like Suntec REIT’s occupancy rate, which remains healthy across its portfolio. Its primary market, Singapore, remains strong, with office portfolio occupancy at 97.4% and retail portfolio occupancy at 97.9%. Australia’s portfolio declined slightly to 95.4%, and its UK portfolio declined to 93.5%. Despite the slight decline, Suntec REIT’s overall occupancy rate remains healthy.
Our Concerns
After reviewing Suntec REIT’s Q3 2023 financial updates, we are concerned about its high debt level. Last quarter, the aggregate leverage ratio climbed to 42.7%, and the adjusted ICR fell to 2.0x. This aggregate leverage ratio is close to the 45% regulatory limit.
As we expect the high-interest rate environment to persist longer, the 20.93% and 15.47% of its debt due for refinancing in 2024 and 2025 may cost more to refinance and further weaken its debt profile, putting downward pressure on distributions to unit holders.
In the worst case, Suntec REIT may need to divest its portfolio or raise capital via rights issues to strengthen its balance sheet. So far, Suntec REIT has divested three strata units at Suntec Office Towers. We are not particularly fond of this because we believe Suntec Office Towers is one of the REIT’s most valuable assets.
We will keep an eye on the REIT’s debt level to see whether it can improve its debt profile.
To learn more about Suntec REIT, please visit our Suntec REIT analysis page or our Suntec REIT dividend page.
You can view our Singapore REITs data page for analysis on other REITs.
Related page: Q3 2023 presentation slide
