In the period, Suntec REIT reported a 4.3% y-o-y rise in distributable income to $45.9 million, translating to a dividend per unit (DPU) of 1.563 cents.
Lock and Li note that this was due to better operating performance across all of the REIT's properties, with the exception of 55 Currie St in Adelaide, as well as lower financing costs, partly offset by higher withholding tax provision in Australia due to the loss of its managed investment trust (MIT) status in FY2025.
Suntec REIT's aggregate leverage stood at 43.4% as at end-1QFY2025 while all-in financing cost dipped 10 basis points (bps) q-o-q to 3.96%.
The REIT has also completed refinancing $730 million worth of A$ and GBP loans due in FY2025 and FY2026, resulting in interest savings of $1.8 million per annum (p.a.).
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In regards to occupancy, Singapore office committed occupancy came in at a healthy 98.7%, benefitting from an increased 8% rental reversion during the quarter on 213,000 square feet of space leased.
Management has maintained its rent reversion guidance at a positive 1% to 5% for the FY2025 given the average expiring rents of $10.21 per square feet (psf) at the Suntec Office, also indicating that demand remained cautious due to weaker business sentiment amid a softer global macro outlook.
On the Australia portfolio, committed office occupancy was stable q-o-q at 90.9% in the 1QFY2025.
Lock and Li write: "Suntec REIT indicated that the office leasing environment in Adelaide will remain challenging in FY2025 due to elevated vacancy levels."
Lastly, UK office portfolio occupancy stands at 95.3%, while 3% of the REIT's UK leases are expiring in the 9MFY2025, with management expecting the renewals to remain positive in the full-year.
For the REIT's Suntec Mall, occupancy stands at 98.2% and rent reversion at a robust 10.4%.
"Shopper traffic and tenant sales both fell 3% y-o-y in 1QFY2025. Management guided that Suntec Mall should continue to benefit from positive rental reversions of 5% to 10% in FY2025," write the analysts.
They add: "Meanwhile, Suntec Convention net property income (NPI) surged 176.9% y-o-y to $3.6 million in 1QFY2025 on the back of greater revenue from meetings, incentives, conventions and exhibitions (MICE) events and improved margins due to higher-yielding events and lower utilities rates secured."
Looking forward, Lock and Li have lowered their FY2025 to FY2027 DPU by 2.1% to 3.67% as they account for a higher effective tax rate for Suntec REIT's Australia portfolio and for its latest FY2024 annual report.
Key upside risks noted by them include a faster-than-expected strengthening of the REIT's balance sheet through capital recycling activities or a faster-than projected decline in its effective funding cost, as well as quicker backfilling of occupancies at its overseas properties.
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Conversely, downside risks include higher-than-expected interest rate hikes and a protracted weak macro outlook that could dampen demand for its office space.
Meanwhile, the research team at OIR have also kept their "hold" call at an unchanged fair value (fv) of $1.14.
The team notes that Suntec REIT's DPU increase to 1.563 cents was its "first positive y-o-y DPU growth since 1HFY2022."
"Results were in-line with our expectations as 1QFY2025 DPU formed 24.9% of our FY2025 forecast," adds the team.
On the REIT's moderating rent reversions in Singapore, the team writes: "While office tenants have not indicated intentions to downsize, there is generally a more cautious mood and this could delay decision making on signings."
Presently, Suntec REIT's balance sheet remains stretched, as its aggregate leverage ratio increased from 42.4% as at Dec 31, 2024 to 43.4% in the latest period.
The team notes that 65% of its borrowings have been hedged, which was higher by 7 percentage points q-o-q. Its all-in financing cost dipped slightly by 10 bps q-o-q to 3.96%, and its interest coverage ratio stood at 1.9 times.
Potential catalysts highlighted by the OIR team include stronger-than-expected recovery in office and retail rents, DPU-accretive acquisitions and finally, better-than-expected momentum in footfall and tenants' sales for Suntec City Mall.
On the other hand, one main investment risk is the non-renewal of leases by key tenants.
As at 4.09 pm, units in Suntec REIT are trading 1 cent higher or 0.88% up at $1.15.
