ANALYSTS have shaved the target price on Suntec Real Estate Investment Trust : T82U 0% (Suntec Reit), as they expect financing costs to be a drag on profitability with interest rates staying elevated.

The cuts come days after the Reit posted a decline in third-quarter distributions, and announced plans to divest more strata units in its Suntec office towers to bring down its gearing levels.

Most research houses have maintained their neutral recommendations on the counter, as the Reit’s better-performing assets could moderate some of the impact.

On Tuesday (Oct 24), Phillip Securities maintained “buy” on Suntec Reit and an unchanged target price of S$1.47, which implies a potential 30.1 per cent upside from the counter’s last trading price of S$1.13 as at 1.13 pm.

Suntec Reit’s units were trading 1.8 per cent or S$0.02 higher at the time.

“We believe much of the downside risk, including larger-than-expected expansion in cap rate and slower-than-expected divestment, has been factored into the current share price,” said Phillip Securities analyst Liu Miaomiao.

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She noted that Suntec Reit is currently trading at an FY2023 yield of around 6.1 per cent and 0.52 times its net asset value. DBS Group Research, meanwhile, said the Reit’s FY2024 yield, which is under 6 per cent, is lower than its peers’.

Although the Reit’s valuation is attractive from a historical perspective, Maybank analyst Krishna Guha believes downside risks still remain when it comes to elevated gearing, potentially lower asset values, and the continued repricing of interest costs.

He retained Maybank’s “hold” call on Suntec Reit, but cut its target price to S$1.15 from S$1.30 to account for a higher risk-free rate.

Echoing the sentiment, RHB believes interest costs will continue to affect Suntec Reit’s bottom line in FY2024, as only around half of the Reit’s debt is hedged. It dropped its target price to S$1.20 from S$1.40, and stayed “neutral” on the counter.

Refinancing the Reit’s FY2024 debt remains a concern, as it seems that high interest rates are here to stay for longer, noted DBS analysts Rachel Tan and Derek Tan. They maintained their “hold” call on the Reit, but slashed their target price by 25 per cent to S$1.10 from S$1.48, implying a potential downside of 2.7 per cent.

That being said, DBS’ research team understands that Suntec Reit’s lenders are willing to provide more relaxed covenant limits. The manager is in talks with the said lenders as part of steps to ensure it does not breach the 45 per cent gearing limit.

Last Friday, the manager reported that gearing climbed to 42.7 per cent as at Sep 30, 2023. This was up slightly from 42.6 per cent three months earlier.

Plans to sell S$100 million in strata units in its Suntec office towers could reduce gearing by 100 basis points, providing a buffer against potential year-end valuation declines.

The Reit is close to 40 per cent of its target so far, the manager’s chief executive Chong Kee Hiong said on Monday. He also said that raising capital via a rights issue to address gearing is also the “last priority” for the manager.

RHB and CGS-CIMB noted a lack of near-term catalysts for Suntec Reit’s unit price. For CGS-CIMB, more clarity on the Reit’s asset divestments and capital management progress is needed. It lowered its target price by 15 per cent to S$1.25 from S$1.48, and retained its “hold” call.

On Friday, the Reit posted a 14 per cent year-on-year drop in distribution per unit to S$0.01793 for the three months ended September, as higher financing costs and a weaker Australian dollar ate into earnings. The results were in line with Phillip Securities, CGS-CIMB and RHB’s expectations, they said in separate reports.