Suntec REIT (SUN SP) 1Q25: Strong Singapore Assets Underpin Hold Rating Despite TP Cut

CGS International April 28, 2025
Suntec REIT 1Q25 Analysis: Stable Singapore Core Amidst Overseas Challenges, Hold Rating Maintained

1Q25 Financial Performance: In Line with Expectations

Suntec REIT (SUN) reported its first-quarter results for 2025, demonstrating resilience primarily driven by its Singapore assets. The Distributable Income for 1Q25 saw a year-on-year increase of 4.3%, reaching S$45.9 million. This translated into a Distribution Per Unit (DPU) of 1.563 Singapore cents, marking a 3.4% rise compared to the same period last year. This performance aligns with forecasts, representing 24.4% of the full-year FY25 forecast.
The improved results stemmed from stronger operating performance across most of its properties and reduced financing costs. However, this was partially counteracted by higher withholding tax provisions in Australia, anticipated due to the expected loss of its Managed Investment Trust (MIT) status in the financial year 2025. An exception to the positive property performance was noted at 55 Currie St in Adelaide.

Financial Health: Leverage and Financing Costs

As of the end of 1Q25, Suntec REIT’s aggregate leverage stood at 43.4%. Encouragingly, the all-in financing cost decreased by 10 basis points quarter-on-quarter to 3.96%. Management highlighted the successful completion of refinancing S$730 million worth of Australian dollar and British pound loans originally due in FY25 and FY26. This proactive measure is expected to yield annual interest savings of approximately S$1.8 million.

Singapore Office Portfolio: Healthy Occupancy and Positive Reversions

Suntec REIT’s Singapore office portfolio remains a key strength.

• Occupancy: Committed occupancy was healthy at 98.7% at the end of 1Q25.
• Rental Reversion: The portfolio achieved a positive rental reversion of 8% during the quarter for approximately 213,000 square feet of leased space. Suntec Office specifically saw a +5.5% reversion.
• FY25 Guidance: Management maintained its positive rental reversion guidance for the Singapore office portfolio at +1% to +5% for the full year FY25. This is supported by average expiring rents of S\$10.21 per square foot per month at Suntec Office.
• Market Sentiment: Despite the positive outlook, management noted that demand remains cautious due to weaker business sentiment influenced by a softer global macroeconomic outlook.

Overseas Office Portfolios: Mixed Performance

• Australia: Committed office occupancy was stable quarter-on-quarter at 90.9% in 1Q25. However, the leasing environment in Adelaide is expected to remain challenging throughout FY25 due to elevated vacancy levels in the market.
• UK: The UK office portfolio reported an occupancy of 95.3% in 1Q25. With only 3% of UK leases expiring in the first nine months of FY25, management anticipates that lease renewals will continue to achieve positive reversions in 2025.

Suntec Retail and Convention Centre: Robust Outlook

• Suntec Mall: Occupancy stood strong at 98.2% at the end of 1Q25, accompanied by a robust rental reversion of +10.4%. While shopper traffic and tenant sales experienced a slight dip of 3% year-on-year in 1Q25, management guides for continued positive rental reversions between +5% and +10% for the full year FY25.
• Suntec Convention: The convention centre demonstrated a significant turnaround, with Net Property Income (NPI) surging by 176.9% year-on-year to S\$3.6 million in 1Q25. This impressive growth was attributed to increased revenue from MICE (Meetings, Incentives, Conferences, and Exhibitions) events and improved profit margins resulting from higher-yielding events and favourable lower utilities rates secured.

Analyst Outlook: Revised Forecasts and Investment Recommendation

Based on the 1Q25 results and updated assumptions, forecasts for FY25-27F DPU have been lowered by 2.1% to 3.67%. These adjustments primarily factor in a higher effective tax rate for the Australian portfolio following the anticipated loss of MIT status and incorporate updates from the latest FY24 annual report.
Despite the DPU forecast reduction, the recommendation is maintained at Hold. The revised Dividend Discount Model (DDM)-based Target Price is now S$1.26 (down from S$1.33), calculated with a Cost of Equity (COE) of 8.43%. The rationale for the Hold rating stems from perceived limited near-term upside potential.
Key changes in this note:

• FY25F DPU decreased by 2.1%.
• FY26F DPU decreased by 2.7%.
• FY27F DPU decreased by 3.67%.

Investment Risks and Potential Upsides

Potential factors that could lead to better-than-expected performance (upside risks) include:

• Faster-than-anticipated strengthening of the balance sheet through capital recycling activities.
• A more rapid decline in the effective funding cost than currently projected.
• Quicker backfilling of vacant spaces in its overseas properties.

Conversely, potential challenges (downside risks) include:

• Higher-than-expected increases in interest rates.
• A protracted weak macroeconomic outlook that could further dampen demand for office space.

Financial Summary

Earnings Revisions Summary

S-REIT Peer Comparison

Note: NR estimates are based on Bloomberg consensus forecasts. Share price as at 25 Apr 2025.

ESG Performance and Initiatives

Suntec REIT’s commitment to Environmental, Social, and Governance (ESG) factors is reflected in its LSEG ESG Scores for FY23:

• Overall Score: C+ (Combined)
• Pillar Scores: Environmental (B-), Social (C), Governance (C)
• Controversies Score: A+ (Strong)

ESG Commitments & Targets:

• Long-Term Goals: Achieve carbon-neutral status for all Australian and UK assets and net-zero carbon status for assets with full ownership control by 2030F. Aim for net-zero carbon status (including Scope 3 emissions) for the entire portfolio by 2050F.
• Near-Term Targets (FY24F): Reduce energy intensity by 3% compared to FY19 levels and maintain water intensity over the same period.

Key ESG Achievements & Highlights (FY23):

• Achieved the highest 5-star rating in its 2023 GRESB submission and an ‘A’ rating for public disclosure.
• Properties like 477 Collins St and Nova Properties attained WELL Platinum Certification.
• 100% renewable energy usage at 21 Harris St, 477 Collins St, Nova Properties, and The Minster Building.
• Achieved carbon-neutral status for 177 Pacific Highway and 55 Currie St.
• Obtained a ‘B’ EPC Energy Rating for The Minster Building.
• Upgraded Building Management Systems (BMS) at 55 Currie St and Southgate Complex.
• Conducted cyclical replacement of Air Handling Units (AHUs) at Suntec Office Towers and One Raffles Quay.
• Social initiatives included a toy collection drive at Suntec City for the Food from the Heart Toy Buffet Carnival (benefiting ~2,000 children) and a donation drive for the Lee Kuan Yew Centennial Fund.
• As of June 2024, approximately 70% of its debt comprised green or sustainability-linked loans.

Areas for Attention:

• The Governance pillar is ranked ‘C’, and the environmental innovation rating is relatively low at ‘D+’. Improvements in these areas could enhance the overall ESG score.
• SUN ranks 77th out of 104 Singapore companies and 23rd out of 26 Singapore real estate peers according to LSEG data.
• While the overall ESG rating of ‘C’ has remained stable from 2019-2023, the Environmental and Governance ratings weakened during this period.

Currently, no explicit premium or discount for ESG factors is applied in the fundamental valuation of Suntec REIT. However, continued efforts in ESG are expected to potentially lead to improved operational efficiencies and financial performance over time.

Detailed Financials

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Key Ratios

Key Drivers

Analyst Certification and Disclosures

The analysts responsible for this analysis certify that the views expressed herein accurately reflect their personal views about the issuers and securities analyzed, and were prepared independently. No part of the analysts’ compensation was, is, or will be directly or indirectly related to specific recommendations or views expressed. While analysts may receive compensation based on their coverage performance, information barriers are in place to prevent conflicts of interest arising from investment banking activities.
Significant Financial Interests:

• As of April 23, 2025, CGS International has a proprietary position in the securities of Suntec REIT.
• As of April 28, 2025, the analysts who prepared this analysis, and their associates, do not have an interest in the securities of Suntec REIT.

It is noted that Chan Swee Liang Carolina, the Group Chief Executive Officer of the CGS International group of companies, is an independent non-executive director of City Developments Limited as of December 29, 2020. CGS International is of the view that this does not create a conflict of interest affecting the independence of this analysis.
This information is general in nature and does not constitute a specific investment recommendation. Investors should conduct their own evaluation and consult professional advisors.