Apart from Frasers Centrepoint Trust, which have released its financial results for the 2nd half, as well as for the full-year of 2021/22 ended 30 September this morning (you can check out my review of it here), Suntec REIT (SGX:T82U) is another REIT in my long-term investment portfolio (you can check out a list of companies I have investments in here) to have made available its business update for the third quarter of FY2022 ended 30 September 2022 early this morning (26 October 2022.)

For those of you who are not familiar with the REIT, its property portfolio comprises more than just Suntec City Mall, Office, and Convention Centre – in Singapore, the REIT also have a one-third interest in One Raffles Quay, Marina Bay Financial Centre Towers 1 & 2, as well as the Marina Bay Link Mall; in Australia, the REIT holds a 100.0% interest in 177 Pacific Highway, 21 Harris Street (both of them located in Sydney), a 50.0% interest in Southgate Complex, Olderfleet, 477 Collins Street (both of them located in Melbourne), and a 100.0% interest in 55 Currie Street (located in Adelaide); in the United Kingdom, the REIT has a 50.0% interest in Nova Properties, Victoria, West End, as well as a 100.0% interest in The Minster Building in the City of London. In total, its assets under management amounts to S$12.1bn.

As this is just a business update, the REIT did not provide its full financial statements for the current quarter under review, only some key financial figures, which we will look at in this post, together with its portfolio occupancy and debt profile, as well as its distribution payout to its unitholders for the current quarter under review (the REIT is one of the few remaining Singapore-listed REITs that have continued its quarterly payout policy – which is something I like.)

Let’s begin:

Financial Performance (Q3 FY2021 vs. Q3 FY2022, and 9M FY2021 vs. 9M FY2022)

In this section, you’ll find my review of the REIT’s financial performance both on a quarter-on-quarter basis (i.e. Q3 FY2021 vs. Q3 FY2022), as well as on a year-on-year basis (i.e. 9M FY2021 vs. 9M FY2022):

Q3 FY2021 vs. Q3 FY2022:

My Observations: On a quarter-on-quarter (q-o-q) basis, the retail and office REIT’s results is largely a positive one, with the slight negative being its decline in distributable income to unitholders.

The 15.7% and 12.1% growth in its gross revenue and net property income respectively can be attributed to higher contributions from Suntec City (Singapore), The Minster Building (United Kingdom), but offset by lower occupancy at 177 Pacific Highway (Australia) and absence of surrender fee received in the same time period last year (i.e. Q3 FY2021), along with a weaker Australian Dollar against the Singapore Dollar.

The 5.8% decline in its distributable income to unitholders was due to higher financing costs, along with higher asset management fees in cash (50% in Q3 FY2022, compared to just 20% in Q3 FY2021.)

9M FY2021 vs. 9M FY2022:

My Observations: The above table was self-computed based on the REIT’s results over the first 9 quarters this financial year, as well as the previous year.

In my personal opinion, its financial results for the period under review is a pretty decent one – with its gross revenue and net property income both recording a good double-digit percentage growth.

Portfolio Occupancy Profile (Q2 FY2022 vs. Q3 FY2022)

Next, let us take a look at the REIT’s portfolio occupancy profile, where I will be comparing the stats reported for the current quarter under review (i.e. Q3 FY2022 ended 30 September 2022) against that reported in the previous quarter 3 months ago (i.e. Q2 FY2022 ended 30 June 2022) to find out if it has continued to remain resilient:

My Observations: Compared to the previous quarter, I’m encouraged to see the REIT’s occupancy rate for the various property types in all the geographical locations improving. Not only that, but I note that they have been maintained at above 95.0% as well (which is very resilient in my opinion.)

As far as lease expiries are concerned, for Singapore Retail, 2.5% of the leases will be expiring in the remaining quarter of FY2022, with another 23.4% of the leases expiring in FY2023; for Singapore Office, 2.6% of the leases will be expiring in the remaining quarter of FY2022, with another 21.9% of the leases expiring in FY2023; for Australia (Retail & Office), just 1.0% of the leases will be expiring in the remaining quarter of FY2022, with another 25.2% of the leases expiring in FY2023; for United Kingdom Office, only 3.9% of the leases will be expiring in FY2023 – in my opinion, with about 20+% of the leases due for renewal just about all of the different property types in the various geographical locations, a favourable lease renewal signed will contribute to the REIT’s gross revenue positively. On the other hand, weakness in the Australian Dollar and the British Pounds against the Singapore Dollar could offset some of the gains.

Debt Profile (Q2 FY2022 vs. Q3 FY2022)

As much as I like the REIT’s management for continuing to report its full financial results on a quarterly basis, and at the same time maintaining its quarterly distribution payout policy, but one thing I am not too comfortable is its debt profile – particularly, its aggregate leverage is one of the highest among the Singapore-listed REITs, and its interest coverage ratio is one of the lowest – despite these 2 statistics having improved in the recent quarters, but I’m still closely monitoring them.

That said, in the current quarter under review, has the REIT’s debt profile continued to record improvements? Let us find out below, where I will be comparing the statistics recorded for the current quarter under review (i.e. Q3 FY2022 ended 30 September 2022) against that recorded in the previous quarter 3 months ago (i.e. Q2 FY2022 ended 30 June 2022):

My Observations: Apart from its aggregate leverage staying unchanged from the last quarter (even so, at 43.1%, it is very close to the regulatory limit of 50.0%, and this could impact its ability to embark on further acquisitions to further improve its financial results and returns to unitholders), the other statistics have deteriorated – particularly, its interest coverage ratio have gone down to 2.5x (and if it were to come down further, then the regulatory limit for its aggregate leverage will be at 45.0% – at its current level of 43.1% as at 30 September 2022, it is extremely close to this limit.)

Also, with just 58% of the borrowing hedged to fixed rates (which is a very low percentage in my opinion), its ability to sustain its current distribution payouts will be impacted by interest rate hikes – no doubt it has no more borrowings expiring in the remaining quarter of FY2022, but in FY2023, S$1,019m (or about 21%) of its borrowings will be expiring, with another S$900m (or about 19%) of its borrowings expiring in FY2024 – coupled with the fact that interest rates are set to hike further, I foresee its average cost of debt to go up in the coming financial year ahead, and impact its distribution payout to a certain extent.

Distribution Payout to Unitholders

For the current quarter under review, the REIT’s management have declared a distribution payout of 2.084 cents/unit – a 6.6% decline compared to 2.232 cents/unit declared in the same time period last year (i.e. Q3 FY2021.)

If you are a unitholder of the REIT, do take note of the following dates regarding its distribution payout:

Ex-Date: 03 November 2022
Record Date: 04 November 2022
Payout Date: 29 November 2022

However, on a year-on-year (y-o-y) basis, together with its payout of 2.391 cents/unit in the first quarter, and 2.42 cents/unit declared in the second quarter, its payout for the first 9 months of FY2022 amounts to 6.894 cents/unit – a 8.0% improvement from the 6.386 cents/unit declared in the same time last year (i.e. 9M FY2021.)

Management’s Comments & Outlook

CEO Mr Chong Kee Hiong, on the REIT’s Latest Results:

“We are pleased that amidst the challenging market environment, the committed occupancies and rents across all our office, retail and convention properties in Singapore, Australia and United Kingdom registered improvements.

High interest rates and rising energy costs will impact our distribution significantly moving forward. To help us better navigate such challenging macro-environment, plans are in place to unlock value through asset enhancement initiatives as well as explore opportunities for divestment of mature assets at an opportune time.”

Outlook:

Singapore Office Portfolio: Despite the challenges of COVID-19, the Singapore Office portfolio remains strong. While macro headwinds and challenges may dampen business sentiments, healthy occupancy and rent will be underpinned by the tight office supply. Revenue contribution for the Singapore Office portfolio is expected to strengthen further.

Suntec City Mall: Traffic and sales recovery at Suntec City Mall is expected to continue into 2023, boosted by the return of office, convention and tourist crowds. The return of more atrium and roadshows and stronger occupancy at the mall is expected to support revenue recovery.

Suntec Convention: The strong pipeline of MICE events returning to Singapore in 2022 and 2023 will boost the business at Suntec Convention. In addition, domestic demand for consumer and corporate events will continue to support Suntec Convention's recovery. While a return to profitability is expected for 2022, income contribution is expected to be below pre-COVID levels.

Australia Portfolio: Although economic growth is expected to slow down, employment rates are likely to remain high. A slight increase in Nationwide CBD office vacancy is expected. Prime gross effective rents in Melbourne and Sydney are expected to improve as flight to quality continues. Australia Portfolio revenue is expected to remain resilient, supported by strong occupancy, annual rent escalations and long lease tenures.

United Kingdom: Economic outlook remains weak in light of a potential recession. Higher interest rates will likely dampen asset values for the UK Office Portfolio. However, revenue for the UK Office Portfolio is resilient, underpinned by limited new supply in Central London, high portfolio occupancy and long WALE with minimal lease expiry until 2027.

Closing Thoughts

While its financial performance (both on a q-o-q, as well as on a y-o-y basis) is a pretty decent one on the whole, along with its portfolio occupancy remaining resilient (with occupancy rates of the various property types in the different geographical locations at above 95.0%), but just like in the previous quarters, its debt profile is something I’m very concerned about – apart from its high aggregate leverage and low interest coverage ratio, but in light of the current rising interest rate environment, the REIT only has 58% of its borrowings hedged to fixed rates – meaning its distribution payout in the coming financial year will very likely be negatively impacted.

Despite of that, I am still staying invested in the REIT for now (for the fact that its financial performance and portfolio occupancy profile is still at a level I’m happy with.) However, I’m not going to increase my unitholding (for those of you who may be curious if I will be increasing my unitholding to bring down my average invested price in it – currently at $1.75.)

With that, I have come to the end of my review of Suntec REIT’s business update for the third quarter ended 30 September 2022. Please note that all the opinions above are purely mine which I am sharing for educational purposes only. They do not imply any buy or sell calls for the REIT. As always, please do your own due diligence before you make any investment decisions.

Related Documents

• Press Release
• Presentation Slides

Disclaimer: At the time of writing, I am a unitholder of Suntec REIT.