He writes: “We recommend unitholders to reject the low-ball privatisation offer of $1.19 per share, which values the REIT at a 42% discount to its latest book value (BV).”
“BV is conservative in our view, considering that its key asset Suntec Office is valued at $2,716 per square foot (psf) versus strata Suntec office units that were divested in the market at 20% higher psf,” adds Natarajan.
He believes the offeror’s potential next steps is a likely acquisition of the REIT manager, in order to gain better control over the REIT or push for internalisation to extract value.
Meanwhile, the RHB analyst expects more divestments in FY2025, with further divestments of strata units at Suntec Office and possibly an Australian asset. The proceeds could then be used to pay down Suntec REIT’s $200 million in perpetual securities that are due in October 2025.
“We believe valuations have bottomed and, as such, are not concerned over Suntec’s relatively high gearing of 42.4%.”
On the REIT’s portfolio, Natarajan sees that the Singapore office portfolio rent reversion rates are expected to moderate to 1% to 5%, while the UK portfolio’s committed occupancy rate is expected to increase in FY2025, although some leasing downtime is expected. In Australia, the outlook for its Sydney and Melbourne office assets is stabilising and likely to gradually improve, but the Adelaide office market remains a challenge.
Overall, FY2024 operational DPU dropped 2.3% y-o-y due to higher interest costs, foreign exchange (forex) impact and higher vacancies at two of its overseas assets. With financing costs rising 22 basis points (bps) y-o-y to 4.06% per annum (p.a.), Natarajan expects this figure to peak at around 4.25% in FY2025, as some of the REIT’s low-cost fixed rate hedges roll off.
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“We trim FY2025 to FY2026 DPU by 3% to 4%, factoring in higher financing costs from debt hedges rolling off, and roll forward our dividend discount model (DDM) valuation by a year.”
CGSI’s Lock on the other hand is more bearish on the Suntec REIT in the coming years. The analyst has lowered her FY2025 and FY2026 DPU estimates by 2.45% and 4.81% respectively as she assumes a “more drawn-out recovery period from [the REIT’s] overseas properties.”
She also notes that Suntec REIT’s portfolio value as at the end of FY2024 fell by 1.2% due to lower property values in Australia and the UK. The REIT’s aggregate leverage was 42.4% at the end of December 2024.
On the REIT’s Singapore mall, occupancy stood at 98.4% at end-4QFY2024 and rent reversion was a robust 23.2% higher in FY2024. Shopper traffic also rose 6.2% y-o-y in FY2024 but tenant sales remained flat y-o-y over the same period.
“Management guided that Suntec Mall should continue to benefit from positive rental reversions of 10% to 15% in FY2025. Meanwhile, Suntec Convention’s net property income (NPI) improved 10.3% y-o-y in 2HFY2024 to $12.9 million on lower cost from organising smaller but higher yielding events,” writes Lock.
Her new target price is based on lower projected DPU estimates for FY2025 to FY2027 due to limited near-term catalysts.
As at 1.30 pm, shares in Suntec REIT are trading 1 cent lower or 0.83% down at $1.19.
