SGX-Listed Suntec REIT Sees Distributions Slide on Interest Rates, Forex

SGX-listed Suntec REIT saw its distributable income drop to S$50.3 million in the first quarter, down 27 percent from a year earlier as high borrowing costs foreign exchange issues offset higher revenues from its core business.

Distributable income per unit from the trust’s portfolio of office and retail assets in its home city, Australia and the UK fell to 1.74 Singapore cents in the January through March period, down more than a quarter from the same time last year, according to its earnings report released Tuesday. This decline in earnings came despite a 10 percent increase in gross revenue which climbed to S$108.7 million during the period.

“Looking forward, our operating performance is expected to continue to improve but interest rate and energy cost are likely to remain high which will impact our distribution for the year,” Kee Hiong Chong, chief executive officer of ARA Trust Management, a unit of ESR Group which manages the REIT. “To cushion the impact, we will continue with the distribution of the remaining capital top up for 2023 to provide some support to unitholders in these tough times.”

While Chong said that the manager is also looking to offload mature assets to raise cash and improve the trust’s balance sheet, an analyst specialising in Singapore-listed REITs still expects the ESR-backed trust to record a 15 percent drop in DPU this year as high interest rates will continue to weigh on its income.

Singapore Does The Heavy Lifting

Suntec REIT’s net property income (NPI) rose 5 percent in the first quarter, to reach S$76 million largely thanks to improved contributions from its Singapore office and retail assets, which generate 67 percent of the trust’s total income.

Gross revenues from the REIT’s office properties in the Lion City rose 9.8 percent from a year earlier to reach S$36 million in the first quarter, pushing the segment’s NPI up by 5 percent to S$27 million in the same period.

Despite suffering higher interest expenses, the manager of Suntec REIT said the trust’s earnings still grew thanks to higher occupancy and rising rents from the strata assets it owns in the Suntec City Office complex as well as from its one-third shareholding in the One Raffles Quay office tower.

The trust’s Singapore retail portfolio booked outperformed the office segment, with revenue rising by 11.7 percent and NPI up by 5.4 percent, thanks to stronger leasing at the Suntec City mall. Revenues generated by Suntec Convention Centre also more than doubled to S$9.2 million last quarter on improved bookings of corporate events and conferences.

While a gloomy economic outlook and ongoing market volatility are likely to dent office demand and retail sales in Singapore, the manager said it expects the portfolio to continue delivering strong performance in the coming months. In addition to wholly owning the trust’s manager, ESR Group is also the largest unit-holder in the trust.

“Rent reversion for the Singapore office portfolio is expected to remain positive and revenue is likely to strengthen on the back of past nineteen quarters of positive rent reversions,” the manager said, adding that the revenue from Suntec City Mall is expected to improve on the back of higher occupancy and rent.”

Overseas Contributions Slide

Beyond Singapore’s borders conditions were more challenging with revenue and NPI in its Australian portfolio both dropping by 5.9 percent year on year to S$23.9 million and S$19.1 million, respectively. While occupancy improved at three of the trust’s five commercial buildings in Sydney, Melbourne and Adelaide, earnings were dragged down by a weak Australian dollar and higher interest expenses.

The trust’s UK assets, which accounted for 12 percent of the REIT’s total income, posted an even steeper drop of 7.2 percent in revenue and a 4.7 percent dip in NPI, due to a weak pound.

Suntec REIT’s manager said it expects revenues from Australia to be dampened by a surge in supply of new office projects in markets where the trust is active, while income from its UK portfolio is likely to remain resilient as occupancy improves with the trust subject to only minimal lease expiry until 2028.

Globally, Suntec REIT’s office portfolio recorded a 98.6 percent committed occupancy with a weighted average lease expiry (WALE) of 4.5 years in the first quarter, while its retail assets were 97.6 percent occupied with a WALE of 2.3 years at the end of March.

Heavy Interest

Vijay Natarajan, vice president for real estate and REIT equity research at RHB Singapore, told Mingtianidi that Sunttec REIT’s strong property performance, the bank expects the REIT’s distributable income to continue to decline in the coming months, in the face of rising interest expenses.

“We expect revenue and NPI to continue to increase both year on year and quarter on quarter in the coming quarter as operationally the REIT remains in good shape,” Natarajan said. “However the gains will be more than offset by rising financing costs, thus distributable income and DPU should continue to see a decline YoY in 2Q.”

Natarajan said that the trust manager may need to consider divesting properties to deploy capital into higher yielding assets and lighten its balance sheet, while also considering asset enhancements as a way to potentially boost returns.

“While market conditions are not ideal for selling as buyers are turning more cautious, Suntec REIT’s good quality assets are likely to attract suitors in our view,” he added.

The REIT had an aggregate leverage ratio of 42.4 percent last quarter, down slightly lower from 42.8 percent a year ago.