Saturday 21 October 2023

Suntec REIT: Danger of Breaching MAS's Limits for REITs in 2024

Suntec REIT has released its 3Q results which shows a definite improvement in revenue due to the improving exhibition segment. However, due to the interest rates hike, Suntec REIT is now moving close to MAS's regulatory limits.

MAS: Leverage below 45%, otherwise ICR equal to/above 2.5

That's MAS's current rule for REITs; falling afoul of it, the REIT has to delever. Below is Suntec's 3Q snapshot of where it is:

At 42.7% leverage and 2.0 times ICR, Suntec REIT has no chance of meeting the ICR threshold. It has to maintain its leverage ratio to be below 45%. This means if valuation falls by 10%, the REIT will need to do equity raising to reduce its leverage back to below 45%

How Likely Will Suntec Face a 10% Drop in Valuation?

In my view, it might not be likely for this year end due to its valuers collaborating to create a close to fraud valuation to protect the REIT. However reality wise, the REIT is tethering towards exceeding the 45% leverage ratio. Here's why:

1. Lease Decay of Suntec Building

Based on Singapore's lease decay and REIT rental reversion for Suntec, there should be about a -0.5% fall in Suntec building's value this year end. This means Suntec CIty Mall should be $2,061,000,000 and Office Towers is $3,102,526,000 (before the effects of cap rate expansion). Hence a $25 million in downward valuation.

2. Cap Rate Expansion

In page 58 of the 3Q report, it shows the cap rate used for its $4.177 billion Singapore office/retail properties is 3.4%-3.5% and retail of 4.25%-4.50% (when Singapore's SORA was 3.0057%). 

Present day, this is an unrealistic cap rate assumption when Singapore's present interbank SORA is at 3.71%. Therefore the logical step would be for 2023's valuation cap rate to be at least 4.1-4.2% for office properties. A revaluation at such a cap rate means Suntec will take a $835 million downward valuation hit

For retail, expected cap rate is 4.75%-5.0%. This will mean about $230 million in downward valuation hit 

3. Effects of the Above

Suntec's assets are valued at $7.908 billion, the effects of the above is a negative $1.090 billion. This will put its assets value at about $6.818 billion and Suntec's leverage to 47.2%. An equity raising of about SGD$200 million is needed to deleverage Suntec REIT to below 45%.

However, in my view, the cap rate used by Singapore valuers for its Singapore office properties will not be 4.1% - 4.2%. Suntec valuers will perform magic close to the act of fraud and I expect the cap rate used to be 3.8% - 3.9% for its Singapore office properties. This will push Suntec's leverage ratio to about 44.5% (just shy of MAS's regulatory limits).

Parting Thoughts

If Suntec's hired valuers are honest, the effect of cap rate expansion, in line with Singapore's SORA increase and lease decay, will put Suntec in breach of MAS's requirements for REITs. Suntec has to do equity raising or hope MAS relaxes its rules for REITs.

Otherwise, it has to turn to the dishonesty of its valuers to help it survive 2024. I will not be surprised Cushman, JLL and especially Colliers will perform excel magic to save Suntec REIT.

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