Suntec REIT: Convention Center Recovery Ahead of Expectations, but Leverage Concerns Remain

Suntec REIT’s T82U third-quarter business update was broadly in line with our expectations. We updated our model to reflect the improved operating performance of its flagship asset and now assume no distribution top-up for 2024 and 2025 following management’s guidance. Consequently, our 2023 distribution per unit was increased by 0.6% while our 2024 and 2025 DPU forecasts were lowered by 10.6% and 2.8%, respectively. We retain our fair value estimate of SGD 1.38 per unit. Although the trust is slightly undervalued based on the last closing price, we currently prefer Keppel REIT for its attractive 2024 dividend yield of 7.3%.

There were a couple of positive takeaways. The trust’s third-quarter 2023 revenue and net property income were 15.0% and 9.7% higher year-on-year respectively, driven by its flagship asset, Suntec City. Notably, Suntec Singapore Convention and Exhibition Center recovered ahead of our expectations, posting a 179.0% year-on-year increase in third-quarter net property income on the back of an 87.4% year-on-year increase in revenue. Suntec City Office and Suntec City Mall also did well, registering a strong positive rental reversion of 14.0% and 25.3%, respectively. Nonetheless, currency headwinds and a higher cost of debt continue to weigh on the trust’s performance, leading to a 14.0% year-on-year decline in third-quarter 2023 DPU to SGD 0.01793. Management expects the year-end valuation for its Australian and United Kingdom assets to decrease slightly, resulting in the aggregate leverage ratio inching up 100 basis points to 43.7% by the end of 2023, assuming no asset divestment to offset the changes.