Suntec REIT has been in a precarious situation with its debt profile. With the latest Suntec REIT Q4 2023 financial update, let us look into its debt profile to see if it has improved over the last quarter.
Suntec REIT’s crown jewel portfolio includes the Suntec City Mall, Suntec Office Towers, and the Suntec Singapore Convention & Exhibition Centre. It also has part-ownership in several office buildings in Singapore. Suntec REIT also has exposure to the Australian and UK markets.
Financial Results
In the following table, we compare Suntec REIT FY2023 and FY2022:
| FY2023 | FY2022 | Change | |
|---|---|---|---|
| Gross Revenue | $462.7m | $427.3m | +8.3% |
| Operating Expenses | ($149.5m) | ($111.5m) | +34.1% |
| Net Property Income | $313.2m | $315.8m | -0.8% |
| Distributable Income | $206.8m | $255.5m | -19.1% |
| DPU | 7.135 cents | 8.884 cents | -19.7% |
The full fiscal year data above shows mixed results, with gross revenue climbing but operating expenses also climbing significantly, offsetting the distributable income. The good news is that gross revenue grew to $462.7m, up from $427.3m in FY2022 (+8.3%). The higher revenue was mainly contributed by the higher income from its Suntec City properties but offset by the lower revenue contributed by its Australian portfolio.
The bad news is that operating expenses jumped by 34.1%, from $111.5m in FY2022 to $149.5m in FY2023. With such a jump in operating expenses, the net property income declined by 0.8% to $313.2m in FY2023. As a result, the DPU declined by 19.7% to 7.135 cents.
Overall, the financial result is expected and within our expectations. The higher borrowing costs, the weak Australian property market, and the weaker Australian dollar contribute to the headwinds faced by Suntec REIT. Should the higher interest rate environment persist for longer in 2024 and 2025, we may see more downward pressure on the REIT’s DPU.
Debt Profile
We believe Suntec REIT’s debt profile is the big elephant in the room. Let’s see the summary from the latest Suntec REIT Q4 2023 financial update:
| Q4 2023 | Q3 2023 | Change | |
|---|---|---|---|
| Aggregate Leverage | 42.3% | 42.7% | -0.4% |
| Adjusted ICR | 2.0x | 2.0x | No change |
| All-in Financing Cost | 3.84% | 3.78% | +0.6% |
| Weighted Average Interest Maturity | 2.22 years | 2.25 years | 0.03 years |
| Interest Rate Borrowings (fixed) | 61% | 55% | +6% |
In short, Suntec REIT’s debt profile showed slight improvement last quarter. After several quarters of deterioration, the last quarter’s result is a breath of fresh air. Although the overall debt profile still cannot be considered healthy, at least the deterioration has slowed down.
The positive development we can see here is the improvement in its aggregate leverage ratio, which declined by 0.4% to 42.3%. Although this is a step in the right direction, the ratio is still dangerously high to the regulatory limit of 45%. Because Suntec REIT’s adjusted ICR is below the 2.5x threshold, the aggregate leverage ratio limit is capped at 45%. With such a high ratio nearing the limit, it may limit Suntec REIT’s ability to make significant acquisition moves/initiatives to increase shareholders’ value.
Another positive development is the interest rate borrowings hedged to fixed-rate climbed from 55% to 61%. This can help reduce the impact of interest rate fluctuation on the REIT’s bottom line.
Debt Maturity Distribution
Suntec REIT has refinanced around $500m due in FY2024 into FY2028. Around $400m (9.35%) of debt is due for refinancing in 2024, and around $670m (15.67%) is due in 2025. Overall, the debt maturity distribution is well-staggered. With the higher interest rate environment expected to last longer through 2024-2025 and Suntec REIT’s aggregate leverage ratio close to the regulatory limit, we like management’s proactive move to lower refinancing obligations over the next two years to around 25%.
Portfolio Occupancy
One of Suntec REIT’s main strengths has always been its strong portfolio occupancy, especially in Singapore. Let’s look at Suntec REIT’s latest portfolio occupancy data from its Q3 2024 financial update:
| Q4 2023 | Q3 2023 | |
|---|---|---|
| Singapore Office | 99.7% | 99.5% |
| Singapore Retail | 95.6% | 98.6% |
| Australia | 88.6% | 95.4% |
| UK | 93.5% | 93.5% |
Again, we are seeing mixed results here. Singapore office occupancy remained strong, rising 0.2% to 99.7%. Meanwhile, the Singapore retail portfolio fell 3% to 95.6%. The Australia portfolio also fell 6.8%, from 95.4% to 88.6%. Despite the declines, we think Suntec REIT’s portfolio occupancy is still generally healthy.
Further Divestments?
From Suntec REIT’s press release, Mr. Chong Kee Hiong, Chief Executive Officer of the Manager, said, “…Suntec REIT will continue to focus on divestment of our mature assets and strata units at Suntec City Office to deliver accretive earnings, lower our gearing and deliver long-term value to our unitholders.“
Suntec REIT plans to do further divestments of its Suntec City Office assets to reduce its debt load. We believe Suntec City is the REIT’s most valuable asset, so divesting these crown-jewel properties is unfortunate. Regardless, we are pleased that the REIT has a concrete plan to lower its debt burden going forward.
Remarks
Suntec REIT’s Q4 2023 results offer a bit of a silver lining on its debt situation. After several quarters of deterioration, the REIT’s debt profile improved slightly in the last quarter. Despite this, the REIT’s aggregate leverage ratio remains alarmingly high at 42.3%. Given the high leverage ratio, Suntec REIT may find it challenging to make any major acquisition without divesting its portfolio first. This high level of debt may constrain efforts to enhance shareholder value.
We will continue to monitor Suntec REIT’s debt profile in its next financial results to see whether its debt situation improves further.
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: Q4 2023 presentation slide
