Rights issue ‘last priority’ for Suntec Reit as it targets S$100 million in strata divestments

RAISING capital via a rights issue to address gearing levels is the “last priority” for Suntec Reit, Chong Kee Hiong, chief executive of the manager, said on Monday (Oct 23).

“In this climate, getting unitholders to fork out more money just to make the balance sheet stronger, I don’t think is the right thing to do,” he said. “We are still focused on divestments, and the market is still there for divestment.”

The real estate investment trust (Reit) manager is looking to divest more strata units in Suntec office towers, and it aims for S$100 million in such divestments this year.

Chong said the Reit is close to 40 per cent of its target so far. Suntec Reit sold three units in the third quarter, at prices over S$3,000 per square foot (psf) – higher than its book value of S$2,500 psf.

Chong noted that the Reit has strata-titled units in Suntec Towers 4 and 5, but they do not intend to sell these yet.

“We have enough smaller units in Towers 1, 2 and 3,” he said, noting that the strata units in these three towers would give the Reit around S$1 billion worth of assets to divest.

He added that the Reit would sell units if there is buying interest, but it would not want to depress the market, and would look to sell north of S$3,000 psf.

“We are not going to sell our assets cheap,” he said. “The market will come back, so it’s a matter of how much we hold on until the market comes back.”

Chong said Suntec Reit was exploring a sale of some Australian assets, but the market was not conducive. However, there is still demand for strata units, especially from owner-occupiers.

“By selling strata, it’s basically buying us time until the market recovers, where we can go back to selling our mature assets,” he said, adding that any divestment proceeds would be used to pay down debt.

Chong said the manager is currently confident the Reit would not cross the 45 per cent aggregate leverage ratio (ALR) threshold or breach its interest coverage ratio covenants.

Suntec Reit reported last Friday (Oct 20) that gearing as at Sep 30, 2023, climbed to 42.7 per cent, up slightly from 42.6 per cent three months earlier.

Chong said he expects year-end valuations for the Reit’s Singapore assets to hold, but Australia and UK asset values would likely soften year on year.

“On the whole, we expect the impact on ALR to be about 100 basis points up,” he said.

But the Reit’s expected divestment of S$100 million in strata assets this year would bring gearing down by around 100 basis points as well. This would mean that ALR should remain around the current levels.

The Reit reported last Friday that distribution per unit (DPU) for the third quarter fell 14 per cent on year to S$0.01793. This comprised S$0.01595 DPU from operations and S$0.00198 DPU from capital.

Suntec Reit warned of softer office demand in Singapore as tenants look to contain costs. While rent reversion is still expected to be positive, they may not be in the double digits.

Chong said there are currently no plans for any capital top-up for 2024. He noted that the decline in operating DPU is mainly due to high interest costs, but the Reit’s operating statistics in office, retail and convention have remained resilient.

“If the high interest costs remain, I think DPU will be muted compared to 2022,” Chong said.