Following Mapletree Logistics Trust (which released its Q3 and 9M FY2022/23 results yesterday evening, and you can check out my review here in case you’ve missed it), Suntec REIT (SGX:T82U) is the second REIT in my long-term investment portfolio (you can check out the list of all the companies I have investments in here) to release its results for the fourth quarter, as well as for the full year ended 31 December 2022 early this morning (20 January 2023.)

The REIT is one we should be familiar with for its Suntec City (Mall and Office Buildings), and also for its Suntec Singapore Convention and Exhibition Centre.

But many probably do not know that the REIT also have a one-third interest in One Raffles Quay, Marina Bay Financial Centre Towers 1 and 2, and Marina Bay Link Mall in Singapore, 5 properties in Australia (177 Pacific Highway, and 21 Harris Street in Sydney, Southgate Complex [50.0% interest], and Olderfleet, 477 Collins Street [50.0% interest] in Melbourne, and 55 Currie Street in Adelaide), and 2 properties in the United Kingdom (Nova Properties [50.0% interest], and The Minster Building.)

In the rest of today’s post, you’ll read about my review of the REIT’s latest financial performance, portfolio occupancy and debt profile, along with its distribution payout to unitholders for the current period under review.

Let’s begin:

Financial Performance (Q4 FY2021 vs. Q4 FY2022, and FY2021 vs. FY2022)

In this section, you’ll find my review of the REIT’s financial performance first on a year-on-year (y-o-y) basis (i.e. FY2021 vs. FY2022), and followed by on a quarter-on-quarter (q-o-q) basis (i.e. Q4 FY2021 vs. Q4 FY2022) – which I have compiled based on the figures for the second half of the year, as well as for the third quarter:

FY2021 vs. FY2022:

FY2021FY2022% Variance
Gross Revenue
(S$’mil)
$358.1m$427.3m+19.3%
Property Operating
Expenses (S$’mil)
$103.4m$111.5m+7.8%
Net Property
Income (S$’mil)
$254.6m$315.8m+24.0%
Distributable Income
to Unitholders
(S$’mil)
$247.2m$255.5m+3.4%

My Observations: The double-digit percentage growth in its gross revenue (by 19.3%) and net property income (by 24.0%) can be attributed to higher revenue from Suntec City (due to the increase in revenue from its retail and offices), Suntec Singapore (mainly due to higher revenue from corporate events, conferences, and long-term licenses), 21 Harris Street, and Olderfleet, 477 Collins Street, as well as the full year contribution from The Minster Building, partially offset by lower revenue from 177 Pacific Highway (due to lower occupancy along with the lack of one-time surrender fee received last year) and 55 Currie Street.

For the full-year, distributable income to unitholders only went up by 3.4% – while it recorded a 25.2% q-o-q jump in the second quarter, but in the subsequent quarters (i.e. Q3 and Q4), it saw declines (by 5.8% in Q3, and subsequently, by 12.2% in Q4.)

Q4 FY2021 vs. Q4 FY2022:

The following table is a q-o-q review of the REIT’s results which I’ve compiled based on figures provided for the 2nd half, as well as for the third quarter of the respective financial years:

Q4 FY2021Q4 FY2022% Variance
Gross Revenue
(S$’mil)
$98.6m$116.4m+18.1%
Property Operating
Expenses (S$’mil)
$25.4m$30.7m+20.8%
Net Property
Income (S$’mil)
$73.2m$85.7m+17.1%
Distributable Income
to Unitholders
(S$’mil)
$65.3m$57.4m-12.2%

My Observations: The REIT’s double-digit percentage gain in its gross revenue and net property income was let down by a double-digit percentage decline in its distributable income to unitholders (this led to distribution payout for Q4 to fall by 12.7% to 1.99 cents/unit.)

Portfolio Occupancy Profile (Q3 FY2022 vs. Q4 FY2022)

Next, let us take a look at the retail and office REIT’s portfolio occupancy profile – where I will be comparing the stats reported for the quarter ended 31 December 2022 (i.e. Q4 FY2022) against that reported in the previous quarter 3 months ago (i.e. Q3 FY2022 ended 30 September 2022) to find out whether it has continued to remain resilient or showing signs of weakness:

Q3 FY2022Q4 FY2022Difference (in
Percentage Points – pp)
Singapore
Retail
96.5%98.1%+1.6pp
Singapore
Office
99.4%98.5%-0.9pp
Australia
Retail & Office
95.2%97.6%+2.4pp
United Kingdom
Office
98.3%98.3%+0.0pp

My Observations: In my opinion, its portfolio occupancy for its properties in the 3 geographic locations continues to remain resilient – where on the whole, they are still maintained at above 95.0%.

The only slight negative is a dip in its Singapore office occupancy (by 0.9 percentage points, or pp) to 98.5% due to a decline in portfolio occupancy in MBFC Towers 1 and 2 (from 98.5% in Q3 FY2022 to 94.1% in Q4 FY023.)

Debt Profile (Q3 FY2022 vs. Q4 FY2022)

If you have been following my reviews on the REIT’s quarterly results, you are probably aware of concerns I have surrounding its debt profile – particularly, its aggregate leverage is one of the highest among the Singapore-listed REITs (as at 31 December 2022, it is at 43.1%), along with its interest coverage ratio being one of the lowest (as at 31 December 2022, it is at 2.5x – should it fall further, its aggregate leverage limit will be reduced to 45.0% [from 50.0%]; at its current level, it will mean that its aggregate leverage is at the ceiling already.)

That said, has both of these statistics (aggregate leverage and interest coverage ratio) shown improvements in the current quarter under review? Let us find out in the table below (where I will be comparing the debt profile reported by the REIT for Q4 FY2022 ended 31 December against that reported in Q3 FY2022 ended 30 September):

Q3 FY2022Q4 FY2022
Aggregate Leverage
(%)
43.1%42.4%
Interest Coverage
Ratio (times)
2.5x2.4x
Average Term to
Debt Maturity (years)
2.7 years2.9 years
Average Cost of
Debt (%)
2.8%2.9%
% of Borrowings Hedged
to Fixed Rates (%)
~58%~66%

My Observations: What is most disappointing in my opinion is that, with a further decline in its interest coverage ratio to 2.4x, it means that the aggregate leverage limit will be reduced from 50.0% to 45.0% – at its current aggregate leverage of 42.4%, it is almost at the ceiling of the limit already.

Another worrying sight is the further increase in its average cost of debt by another 0.1pp to 2.9%. No doubt its percentage of borrowings hedged to fixed rates have been increased to 66%, but it is still a very low percentage – meaning it is very much exposed to the high interest rate environment.

Finally, looking at its debt maturity profile, 13.3% (or S$646m) of its borrowings will be maturing in the coming financial year 2023, 18.5% (or S$900m) of its borrowings will be maturing in FY2024, and the remaining 68.2% of its borrowings will be maturing in FY2025 and beyond – that said, with about 31.8% of its borrowings due for refinancing over the next 2 years, I expect its distribution payout to unitholders will be further impacted from higher financing costs.

Distribution Payout to Unitholders

The management of Suntec REIT declares a distribution payout to its unitholders on a quarterly basis (this is one of the reasons for my investment in it back in February 2020.) For the current quarter, it has declared a payout of 1.990 cents/unit – comparing to its payout of 2.28 cents/unit, it is a 12.7% decline – in-line with the q-o-q drop in its distributable income to unitholders.

However, on a full-year basis, the REIT’s distribution payout still managed to edged up by 2.5% – from 8.666 cents/unit in FY2021 to 8.884 cents/unit in FY2022, mainly due to a double-digit growth in its distributions in the first, as well as in the second quarters.

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

Ex-Date: 31 January 2023
Record Date: 01 February 2023
Payout Date: 28 February 2023

Management’s Comments & Outlook (from the REIT’s Press Release)

Results for FY2022:

“We are pleased to have achieved stronger operating performance across our portfolio despite a higher cost and interest rate environment.

While we have increased our fixed interest rate borrowings and foreign currency income hedge, the expected continued rising interest rates, weaker exchange rates and higher energy costs are expected to erode operational gains and impact our distribution significantly in the near term. We are also actively looking at the potential divestment of our mature assets to strengthen our balance sheet.”

Outlook Ahead:

Singapore Office Portfolio: The cautious economic outlook will slow the pace of demand for office spaces. Office market is expected to soften notwithstanding tightness in new office supply. Rent reversion is expected to remain positive, though moderated. Revenue of the Singapore Office Portfolio is expected to strengthen on the back of past quarters of positive rent reversion.

Suntec City Mall: Revenue performance from Suntec City Mall is expected to improve, underpinned by higher occupancy, rent and marcoms revenue. The rebound of Meetings, Incentives, Conventions and Exhibitions (“MICE”) events and the return of tourists will help boost tenant sales and mall traffic. However, the growth of tenant sales, which is currently above pre-pandemic level, is expected to slow down in 2023.

Suntec Convention: The recovery of Suntec Convention will be driven by a strong pipeline of international MICE events and the return of larger-scale consumer and corporate events. The easing of China’s travel restrictions will have a positive impact to the convention business from the second half of 2023. Despite recovery gaining strong momentum, income contribution will remain impacted in 2023. Full recovery of the convention business is expected in 2024.

Australia: A slight increase in Nationwide CBD office vacancy is expected due to an increase in new supply. Prime rents in Melbourne and Sydney are expected to improve as the flight to quality trend continues. Australia Portfolio rent reversion is expected to be positive but revenue will be impacted by leasing downtime and incentives.

United Kingdom: Economic outlook remains weak in light of recessionary challenges and slowing employment rates. While office demand remains active, take up rate will slow. Revenue for the UK Office Portfolio will remain resilient, underpinned by high portfolio occupancy and long weighted average lease expiry with minimal lease expiry until 2028.

Closing Thoughts

To sum up, there remains lots of challenges for the REIT (the only bright spot I found in the REIT’s latest results release was in its very strong portfolio occupancy profile across its properties in the various geographical locations in its portfolio) – first, a weaker Australian Dollar, and British Pounds against the Singapore Dollar will affect its returns to unitholders; second, a very worrying debt profile (with aggregate leverage, at 42.4% is at the ceiling already, coupled with the fact that it only has 60+% of borrowings hedged to fixed rates, and 30+% of borrowings due for refinancing over the next 2 years) – where it will be hit with higher financing costs and again, distributions to unitholders will be affected.

Additionally, with interest rates set to remain at elevated levels for quite a while (my opinion is that we may see interest rates going down only sometime in the year 2024), coupled with the fact that its aggregate leverage closing in on the limit of 45.0% (due to its interest coverage ratio falling to 2.4x), no way will the REIT be able to embark on any further acquisitions. In fact, I foresee the REIT needing to make some divestments (again, should it happen, the loss of income from the divested property will see distributions taking a further hit), or embark on rights issue (which is hugely unpopular to unitholders as it causes dilution to their unitholdings) to pare down its aggregate leverage.

No doubt the management have acknowledged the above challenges, but the more important question will be what will they do to navigate through it (as simply by acknowledging it isn’t enough, and I’m sure unitholders will agree with me on this), and I foresee lots of questions will be asked by fellow unitholders on this front in its upcoming annual general meeting (AGM.)

With that, I have come to the end of my review of Suntec REIT’s latest “report card”. Do note that all the opinions above are purely mine, which I’m sharing for educational purposes only. Also, this post does not imply any buy or sell calls for the REIT’s units. As always, please do your own due diligence before you make any investment decisions.

Finally, with the Lunar New Year coming up this weekend, I would like to take this opportunity to wish all my Chinese readers a very happy and prosperous Year of the Rabbit. To all my non-Chinese readers, have a wonderful long weekend!

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

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