For S-REITs, acquisitions and hints of acquisitions have undermined prices

Compare the reaction to Suntec REIT's underwhelming business updates to Keppel DC REIT's more positive announcements

Suntec REIT reported a set of mainly negative results in its 3QFY2023 business updates on Oct 23 with analysts unenthused based on the reports that were issued. So far (as at October 24), the market has ignored the mainly negative outlook to reward Suntec REIT with either no decline in unit price, or a small gain. In Singapore, Suntec REIT owns a one-third stake in Marina Bay Financial Centre Towers I and II, a one-third stake in One Raffles Quay, and Suntec City. It also owns properties in London, Sydney, Melbourne and Adelaide.

Keppel DC REIT (KDC REIT) reported a set of fair results in its 3QFY2023 business updates and analysts were indeed enthused by the data centre landlord. They sounded mainly positive in their various updates, with a couple of analysts explaining KDC REIT’s acquisition strategy. Yet, its unit price fell more than 15% in the four sessions after the results were announced. “Why do analysts think acquisitions are positive?” asks a market participant.

Most recently, Goldman Sachs is blaming KDC REIT’s decline on Neo Telemedia, the master lessee of KDC REIT’s data centres. “With Guangdong data centre market oversupplied, we lower FY2024 and FY2025 DPUs by 10% and 8%, and factor in below-market occupancy of 40% to 50%,” Goldman Sachs says. To be fair, Goldman Sachs had a sell on KDC REIT back in May, and it has now upgraded it to neutral.

Suntec REIT’s 3QFY2023 DPU of 1.793 cents including a committed top-up from capital, (+3.1% q-o-q, but -14% y-o-y), took its 9MYTD DPU to 5.269 cents, down 23% y-o-y. Maybank noted that the DPU was 76.6% of its FY2023 forecast.

Based on the earnings call on Oct 23, it appears that DPU is likely to be lower this year than last year. And, despite the Singapore portfolio doing a lot better than pre-Covid, FY2024’s DPU could be lower than this year’s forecast DPU.

“I was just saying to my friend it was quite amazing that Suntec didn’t drop despite all the negative analyst reports,” the market participant says.

Perhaps it is because Chong Kee Hiong, CEO of Suntec REIT’s manager has been quite transparent about the REIT needing to divest some $100 million of assets to lower aggregate leverage. Valuations of the Australian and UK properties are likely to soften by end-December 2022, and that could impact aggregate leverage by 100 bps. As at September 30, Suntec REIT’s aggregate leverage stood at 42.7%. “We expect to divest $100 million this year. That will bring aggrege leverage down by 100 bps,” Chong says, adding that year-to-date he has achieved around 40% to 45% of his target.

According to him, the Australian market is relatively slow for large property transactions. Hence the preference appears to be selling strata units at Suntec Office Towers. Chong says since the average valuation of Suntec Office is at around $2,500 psf in its books, sale prices which are currently above $3,000 psf are likely accretive.

Suntec REIT and Frasers Centrepoint Trust J69u (FCT) seem to indicate that investors like divestments. In August, FCT announced the divestment of Changi City Point to a largely positive reception from the market.

KDC REIT and Suntec REIT demonstrate that overseas acquisitions have a negative impact on the REIT, and investors aren’t keen on acquisitions. A case in point is the continued haemorrhaging of CapitaLand Ascott Trust Hmn’s (CLAS) price which fell from $1.12 prior to the announcement of the acquisition of $530 million of assets in London, Dublin and Jakarta, and an equity fund raising, to a low of 84.5 cents on October 24 before rebounding to 87 cents by mid-day on October 25.

“At this point, analysts and investors have very different ideas of what is good for the REITs,” the market participant observes.

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