OCBC Investment Research has downgraded Suntec Real Estate Investment Trust (Reit) to “sell” as it expects marginal decline in financing costs in the near term.
The research house believes the trust might not reap significant benefits from the US Federal Reserve’s half-point cut immediately.
While benchmark rate cuts are likely to lower borrowing costs, the trust’s all-in financing costs may not come down significantly in the near term, said OCBC in a report on Friday (Sep 20), as the trust has “a sizeable amount” of interest rate hedges expiring in fiscal year 2025 that were previously entered into at low costs, noted the brokerage. As at end-June, Suntec Reit’s financing costs stand at 4 per cent.
“As such, we are assuming only a slight decline in Suntec Reit’s financing costs in FY2025 as compared to our FY2024 forecasts,” said the brokerage.
Given the Reit’s high proportion of floating rate debt, OCBC believes that the trust could be the first to benefit from the Fed rate cut – buoyed by an uplift in investor sentiment.
However, the research house highlighted the risks of a rebound in the 10-year Treasury yields, which will be affected by the US presidential election.
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Additionally, OCBC also noted that the Reit’s share price has “run ahead of fundamentals”.
“The stock is now trading at FY2024 and FY2025 distribution yields of 4.5 per cent and 4.8 per cent, respectively, based on our projections and a closing price of S$1.37,” it said. “Historically, Suntec Reit had traded at a 10-year average forward distribution yield of 5.7 per cent.”
But the Reit needs to improve its operational performance to sustain its share price movement, said OCBC.