Continue to focus on capital management
- FY23 DPU of 7.135 Scts was in line, at 100.7% of our FY23F forecast.
- Strong Singapore portfolio performance was partly offset by lower overseas contributions.
- Reiterate Hold rating, with a slightly higher TP of S$1.29.
FY23 results highlights
Suntec REIT’s (SUN) FY23 gross revenue grew 8.3% yoy to S$462.7m but distribution income came in at S$206.8m (-19.1% yoy), inclusive of capital distribution of S$23m. FY23 DPU of 7.135 Scts (-19.7% yoy) was broadly within our expectations. While Singapore office portfolio performance improved, higher financing costs, greater vacancies at its Australia and UK properties and weaker A$ impacted its bottomline. Overall portfolio valuation rose 0.7% yoy to S$11.9bn at end-FY23; Singapore portfolio value rose 2.9-3.7% while Australia and UK saw a 4.5-10.2% yoy decline due to a 50-60bp cap rate expansion.
Strong Singapore office portfolio offset lower overseas earnings
Singapore office assets benefited from a +12.3% rental reversion for FY23 (+13.1% in 4Q23). SUN renewed/leased 729k sq ft of space in FY23. Management guided that it expects rent reversions to remain positive in FY24F, although the rental growth trajectory is likely to moderate to mid-single digits. While Australia office properties enjoyed a +16.7% reversion in FY23, overall occupancy dipped to 88.6% with the departure of a major tenant at 55 Currie St. SUN indicated that there is leasing interest and could potentially backfill part of the space by 1Q24. UK contributions were dragged by lower occupancy at The Minster Building, and UK revenue in FY24F is likely to be affected by leasing downtime, according to management.
Retail segment continued to perform well
Suntec Mall’s occupancy dipped to 95.6% as of end-FY23 (from 98.7% as at 3Q23) due to the departure of two tenants, even as rent reversion averaged +21.8% in FY23. The mall enjoyed a refreshed tenant mix of 18 new-to-market brands in FY23. Tenant sales was up 4.1% yoy in FY23, while shopper traffic grew 8% yoy. Management guided that Suntec Mall should continue to benefit from positive rental reversion from rent and occupancy growth due to active leasing demand and limited supply. FY23 revenue from the convention segment exceeded pre-Covid levels by 3.4%.
Gearing steady at 42.3%; more divestments on the cards
SUN divested S$94.4m of Suntec strata offices in FY23, at an average 31% above book value. Proceeds were used to pare debt, keeping gearing stable at 42.3%. Average funding cost rose to 3.84% at end-FY23, and management guided it could further rise to c.4.2% in FY24F. Management indicated that it hopes to further divest more strata office spaces at Suntec Office and mature assets in Australia to enable it to keep gearing at c.40%.
Reiterate Hold
We lower our FY24-25F DPU by 4.59-5.77% on leasing downtime from higher vacancies. However, our DDM-based TP is raised slightly to S$1.29 as we roll forward our assumptions to FY24F. We keep our Hold rating on limited near-term DPU growth prospects. Upside risks: faster-than-expected strengthening of its balance sheet. Downside risks: more-than-expected interest rate hikes and a protracted weaker macro outlook that could dampen demand for its office space.
