Latest / Investor Exchange / Suntec REIT’s FY2025 – A Singapore-Centric Masterclass In Resilience & Yield Acceleration

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Suntec REIT’s FY2025 – A Singapore-Centric Masterclass In Resilience & Yield Acceleration · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Welcome back to the Deep Dive. Today, we're opening up a file that,
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  on the surface, honestly looks like a typo.
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  It's definitely one of those reports that makes you do a double take.
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  It is. And we're looking at the full year financials for SunTech REIT.
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  And the headline number just seems to completely ignore, you know,
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  the general mood of the global economy.
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  Double-digit growth in this climate is, well, it's rare.
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  Rare is an understatement. Yeah. I mean, we're in an environment where everyone's
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  talking about recession risks, office slumps, all of it.
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  Yet here comes SunTech REIT posting a distributable income of $207.3 million.
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  Which is a 14.6% increase year on year. Exactly.
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  And for you, the listener holding the units, the distribution per unit of the DPU is at 7.035 cents.
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  That's up 13.6%. Almost unheard of for a REIT this size right now. Right.
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  So our mission today is pretty specific. We're going to strip away the corporate
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  gloss from these presentation slides because I have a suspicion that when a
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  REIT grows its payout by nearly 15 percent in a flat economy.
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  There's got to be something else going on under the hood. Yes.
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  Some kind of financial engineering. That's a healthy suspicion.
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  And you're right. This isn't a simple story of businesses booming.
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  It's actually a tale of two portfolios moving in completely opposite directions.
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  A tale of two portfolios. I like that. And some very, very tactical moves on
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  the balance sheet that basically saved the day. Okay, let's start with the how.
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  Because when I dug past that shiny DPU number, I found something that just didn't
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  add up. The discrepancy. Yeah.
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  The payout to investors is up almost 15%.
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  But the gross revenue, the actual cash coming in from tenants, is only up 1.7%.
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  And net property income, NPI, is only up 1.9%. Barely moving.
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  It feels like a magic trick. How
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  do you barely grow your revenue and then somehow hand out 15% more cash?
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  Where did that extra money come from? Well, it wasn't a pot of gold in the basement of Suntec City.
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  I was hoping. You've hit on the crucial insight for this entire report.
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  A massive chunk of that boost came from the other side of the balance sheet.
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  Capital management. You mean debt. Precisely.
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  In the fourth quarter of 2025, they pulled off a really significant refinancing the mover.
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  They refinanced about $730 million worth of bank loans.
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  And by doing that, they managed to lower their interest margins by about 25 basis points.
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  Okay, let's pause there because 25 basis points sounds like a rounding error to most people.
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  A quarter of 1%. How does that move the needle so much?
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  It sounds tiny, but on that kind of scale, and $730 million is just a piece
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  of their total debt shaving off A quarter of a percent translates to millions
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  of dollars in saved interest payments. Right.
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  And in the REIT game, interest is your biggest expense after running the actual buildings.
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  If you cut that bill, the savings flow straight to the bottom line,
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  straight into distributable income.
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  So the green numbers we're seeing aren't necessarily because they leased more
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  space. It's because they swapped an expensive credit card for a cheaper one.
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  That is a perfect analogy. It was a defensive move that turned into a huge offensive win for the DPU.
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  And it buffered them against some of the weaker numbers we see elsewhere.
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  Which brings us to the operational side. You call this a tale of two portfolios.
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  I'm guessing the hero of this story is Singapore. Oh, Singapore is definitely the hero.
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  It's doing all the heavy lifting. Without Singapore, this report would look
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  very, very different. Heavy lifting seems right. I was looking at the Suntec City office towers.
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  Committed occupancy is 99.8%. It's effectively full.
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  I mean, 99.8% what's left. A janitor's closet they forgot to list.
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  For all intents and purposes, they are at capacity.
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  But occupancy is only half the story. You have to look at pricing power.
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  Which brings us to rent reversion. Exactly. Right. Let's just quickly unpack that.
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  Rent reversion is the difference between the old rent a tenant was paying and
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  the new rent they sign up for. Correct.
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  And for their Singapore office portfolio, that reversion is positive.
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  It's expected to be near 5%. So not only are they full, but every time a contract
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  rolls over, they're squeezing out 5% more cash.
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  It reflects the supply constraints in the Singapore core CBD,
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  the central business district,
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  There just aren't many new office towers opening. If you want a prime address,
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  you pay the increase. You have no leverage. A landlord's dream. Yeah.
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  But the mall numbers, they looked even more aggressive to me.
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  Suntech City Mall, 99.5% committed occupancy. Also basically full.
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  But the rent reversion there is
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  close to 10%. That 10% figure is the real standout number in this report.
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  It implies retailers are just fighting to get into that space.
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  And it suggests a very strong recovery in retail footfall. It does.
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  Revenue from the mall was up $2.5 million. It tells you they believe being in
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  Suntec City is absolutely essential for their brand.
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  And we can't forget the third pillar, the convention center.
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  I remember during the pandemic years, this thing was a ghost town. It was a liability.
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  Now, for the second half of 2025, revenue was $47.1 million.
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  The return of large-scale conferences has been robust. So if you stopped reading
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  the report right here, you'd think this was the perfect investment.
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  If Suntech Reid only owned assets in Singapore, it would be a perfect report card.
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  But they don't. Okay, cue the ominous music.
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  Let's fly over to Australia. Australia has been difficult. A mixed bag,
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  but leaning heavily towards the negative. I saw that.
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  At 177 Pacific Highway in Sydney, revenue dropped 12%. It's a massive hit for one building. It is.
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  A tenant surrendered three floors, exited the lease early.
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  Ouch. It does kill the cash flow. Now, to be fair, management has already backfilled that space.
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  New leases are starting late 2025, early 2026, but it's temporary paying.
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  OK, but then you look at 21 Harris Street and revenue there is down almost 7 percent.
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  And that's not just one tenant leaving. That's a combo of lower occupancy and
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  the silent killer of international REIT's currency risk. The Australian dollar
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  getting weaker. Exactly.
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  Even if the building makes the same amount in Sydney when you convert it back
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  to Singapore dollars, poof, it vanishes.
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  But the one that really stood out, the one that made me worry,
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  was 55 Curry Street in Adelaide.
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  Ah, yes. The occupancy there is 66.0 percent. It's just 66%.
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  A third of that building is empty.
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  That feels catastrophic. You walk in and every third floor is just dark.
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  It's a huge drag on your margins. You still have to pay to run the whole building right.
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  And this weakness is what's hitting the overall valuation.
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  The net change in fair value loss. So appraisers are saying these buildings
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  are worth less than they were last year.
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  Correct. The market is pricing in that difficulty.
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  Okay, let's hop over to London, the Minster Building. This one confused me.
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  Revenue looked higher up 3.8%.
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  But occupancy dropped to 85.4%. How does that happen?
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  This is why we always read the footnotes. That revenue increase wasn't from
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  rental growth. It was due to a one-off claim received.
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  A claim? You mean like a breakup fee from a tenant leaving? That's the likely
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  scenario. A surrender fee.
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  It's a one-time cash injection that looks good for the quarter,
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  but it masks the reality. Because it's bad news money. It's bad news money, exactly.
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  If you take that fee away, the asset is clearly struggling. So when you zoom out, the story is clear.
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  Singapore is the safety net carrying all the weight while the overseas assets
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  are facing some serious headwinds.
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  And that debt refinancing we talked about earlier was the buffer.
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  Without it, the headline would be much more worry than wow.
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  Let's stick with the financials for a second. There's another bit of jargon
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  in the report. Yeah. MIT status. It says it was maintained for Australia.
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  Why should I care about that? It's actually crucial for tax efficiency.
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  MIT stands for Managed Investment Trust. It's a tax structure in Australia.
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  Because they qualify, the withholding tax on the income they earn there is kept
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  at a lower rate, 10 or 15 percent.
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  If they lost that status, the tax rate could double. So that would just decimate
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  the income coming back to Singapore. It would.
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  So seeing MIT status maintained is a really important, all clear signal. Got it.
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  Okay, so tax is stable. Financing costs are under control.
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  But what about the interest coverage ratio, ICR? It's around 1.9 times.
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  Adjusted, yes. Feel a little tight.
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  It means for every dollar of interest they owe, they're only earning $1.90.
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  It is decent, but you're right. It's not a fortress.
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  A ratio closer to 3 or 4 would feel a lot safer.
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  At 1.9, they really can't afford a significant dip in cash flow from Singapore.
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  Which brings us to the future.
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  The risks for 2026. The report mentioned something about the RTS.
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  The Johor Bahru Singapore Rapid Transit System. Yeah, the train to Malaysia.
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  And the report lists this as a risk for retail spend leakage. It's a valid concern.
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  I mean, think about it. If you can hop on a train and be in Johor Bahru in 15
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  minutes where everything is three times cheaper, why would you shop in Singapore?
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  Why buy groceries or see a movie in Suntec when you can do it for a third of
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  the price across the border.
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  Now, the argument is this usually impacts the suburban malls in the north more heavily.
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  Suntech is central. It relies on office workers and tourists.
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  But it's still a risk. It is. If domestic spending shifts in a big way.
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  Sustaining that 10 percent rent reversion in the mall is going to get a lot
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  harder. What about the risks overseas?
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  In Australia, you said it's hard to find tenants. Is it also expensive to find
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  them? Incredibly expensive.
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  The outlook section mentions incentive levels in Melbourne are likely to stay
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  between 40 and 50 percent.
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  Wait, wait, 50% incentive. What does that even mean?
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  It means there's a huge gap between the face rent, the headline number on the
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  lease, and the effective rent, which is the actual cash that hits their bank
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  account. How does that work in practice?
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  It could be a rent-free period. If you sign a five-year lease,
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  you might not pay any rent for the first two and a half years. You're kidding.
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  Or the landlord writes you a massive check to pay for your desks,
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  your carpets, your entire fit-out. So even if they fill up 55 Curry Street,
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  the actual distributable cash flow might not recover for years.
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  So the recovery in Australia is going to be a long, expensive grind.
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  Very expensive. It's a tenants market over there, the complete opposite of Singapore.
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  OK, before we wrap up, ESG.
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  I saw mentions of the Purple Parade and Ride to Work Day.
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  Is this just fluff, or does it matter to an investor? It's easy to be cynical,
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  but for a landlord, this stuff is all about placemaking.
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  The Purple Parade supports inclusion, yes, but it also cements the mall as a community hub.
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  It brings in footfall. And ride-to-work. That appeals to the modern tenant.
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  Tech companies, law firms, they want buildings with end-of-trip facilities,
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  showers, secure bike racks.
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  If your building doesn't have that, you lose the tenant to the building next
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  door. It's an asset protection strategy, really. OK, let's bring this all together.
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  It really feels like a story of brilliant maneuvering in Singapore that's masking
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  some real struggles abroad. I think that's a fair summary.
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  Stellar performance in Singapore and the management team deserves huge credit
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  for that debt refinancing that protected the DPU.
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  But the overseas portfolio is the elephant in the room. It is.
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  The UK and Australia are a drag on valuation and require heavy capital to fix.
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  The strategy right now is clearly hold the fort.
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  Let Singapore generate cash while they try to plug the leaks overseas.
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  So here's my final thought for you and for our listeners. We're looking at a
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  Singapore portfolio that is 99.8% occupied.
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  Right, at the ceiling. You can't get higher than 100%. They can raise rents,
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  sure, but they can't fill any more empty space.
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  The organic growth engine in Singapore might be running out of fuel.
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  That is the concern, yeah.
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  So the question for 2026 is, have we seen the peak of the Singapore lift?
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  And if the Singapore market cools down even a little bit, can the Australian
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  and UK assets turn around fast enough to pick up the slack?
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  That's the multi-million dollar gamble. When your safety net is stretched this
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  tight, you need the rest of the show to start going perfectly.
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  If Australia doesn't recover before Singapore cools, that DPU growth could reverse very, very quickly.
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  A lot to think about. A great headline number, but the details,
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  they definitely demand caution. As always, thank you for guiding us through it. My pleasure.
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  And to our listeners, thanks for tuning in to this deep dive on SunTech Read.
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  We'll catch you on the next one.
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  Please remember that this content is intended to serve strictly and only as
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  an informational, independent, objective summary of recent events and should
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  in no way be interpreted,
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  construed, or relied upon by any party as inside information or financial advice. See you next time.