Suntec REIT’s unit price (SGX: T82U) has been falling sharply this year due to investor concerns that the REIT’s debt level is nearing its regulatory limit. The REIT has recently reported its financial results for its latest quarter. How was Suntec REIT Q3 2023 result? 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% |
Just at a glance, we can see that there is good and bad news here. The results are mixed because revenue and income increased, but expenses rose sharply, offsetting distributable income.
Revenue climbed by 15% to $123.4m this last quarter, contributed by higher contributions from its crown jewel properties: Suntec City Office, Suntec City Mall, and Suntec Convention.
Operating expenses jumped by 28.5% to $38.8m, contributed by the higher maintenance fund contribution and the commencement of the sinking fund in 2023.
Due to the higher expenses, refinancing cost, and weaker AUD relative to SGD, the distributable income dropped by -13.3% to $52.0m.
The result is pretty much expected, with the DPU declining due to the higher cost and refinancing despite the 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 the higher interest rate environment expected to last longer, the relatively high Suntec REIT debt level is a cause of 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, we can see that Suntec REIT’s debt profile has unfortunately weakened further last quarter. The aggregate leverage ratio increased again to 42.7%, which is 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 the 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 rate.
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 there are no more refinancing needs this year. The bad news is that 20.93% of debt needs to be refinanced next year and 15.47% in 2025. We are paying close attention to the next two years because we are preparing for interest rates to remain high for an extended period.
Should this high-interest rate environment persist in 2024 and 2025, we may see Suntec REIT’s refinancing cost shoot up further and cause its DPU to be under pressure. With the debt profile very close to the regulatory limit, this higher borrowing cost may be a cause of concern for investors. Suntec REIT may need to divest some of its portfolio holdings or raise capital via rights issues to strengthen its balance sheet in the future.
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 the occupancy rate for Suntec REIT, which stays healthy across its portfolio. Its primary market, Singapore, remains strong, with an office portfolio occupancy rate of 97.4% and a retail portfolio occupancy rate of 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 occupancy rate stays healthy overall.
Our Concerns
After looking at the Suntec REIT Q3 2023 financial updates, we are concerned about its high level of debt. The last quarter saw the aggregate leverage ratio climbing to 42.7% and the adjusted ICR declining to 2.0x. This aggregate leverage ratio is close to the regulatory limit of 45%.
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 increase its cost and further weaken its debt profile, creating a downward pressure to the distribution to the 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, we have seen Suntec REIT divesting 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 in the future to see if 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
