Suntec REIT (SGX: T82U) is a real estate investment trust (REITs) listed in Singapore back in 2004. For those who are new to this REIT, Suntec REIT’s own properties in both the office and retail properties sector. As of 31 March 2020, they have a total of SGD 1.6 billion assets under management consisting of 4 properties in Singapore and 5 properties in Australia.
However, it is important to note that they do not wholly-owned all the properties. Here’s Suntec REIT portfolio as at 31 March 2020.
|Suntec City Mall|
|– Suntec City Office Towers||59.0%|
|– Suntec City Mall||100.0%|
|– Suntec Singapore Convention and Exhibition Centre||60.8%|
|One Raffles Quay||33.3%|
|Marina Bay Financial Centre||33.3%|
|9 Penang Road||30.0%|
|177 Pacific Highway, Sydney||100.0%|
|Southgate Complex, Melbourne||50.0%|
|Olderfleet, 477 Collins Street, Melbourne||50.0%|
|55 Currie Street, Adelaide||100.0%|
|21 Harris Street||100.0%|
Throughout 2019 and Quarter 1 2020, there has been a number of key developments in which we will be discussing more over the course of this post.
We will start out with the operational overview of Suntec REIT. By now, you would have known that Suntec REIT consists of (i) both retail and office properties; (ii) properties in both Singapore and Australia. As different sector and region performance are different, we will be looking at the performance on a standalone basis
1. A decline in occupancy rate in the retail sector
|Suntec City Mall||98%||100%||100%|
|Marina Bay Link Mall||100%||98%||99%|
|Singapore Retail Portfolio||n.p||100%||100%|
|Australia Retail Portfolio||n.p||93%||91%|
|Overall Retail Portfolio||n.p||99%||99%|
Looking at the performance of FY19 and Q1 2020 itself, the performance of the Australia retail sector and the performance of Marina Bay Link Mall are rather stable. However, a slight decline in occupancy rate is seen on Suntec City Mall. We notice a decline in occupancy from approximately 100% in FY18 and FY19 to an occupancy rate of 98% in Q1 2020.
This is mainly due to the drop in retail traffic and sales. Comparing to Q1 2019, the annual traffic and tenant sales of Suntec City Mall has declined by approximately 20%. We would expect the performance of Suntec City Mall to further decline in Q2 2020 given the circuit breaker measure which was announced on 7 April 2020. Further, approximately 25.4% of the leases are due to expire in 2020. This will definitely be an area we will be looking closely given the current market sentiment.
2. Resilience operational performance in the office sector
|Suntec City Office||99%||100%||99%|
|One Raffles Quay||98%||98%||96%|
|MBFC Towers 1 & 2||100%||99%||100%|
|9 Penang Road||97%||97%||–|
|Singapore Office Portfolio||n.p||99%||99%|
|177 Pacific Highway||100%||100%||100%|
|55 Currie Street||92%||92%||–|
|21 Harris Street||67%||–||–|
|Australia Office Portfolio||n.p||98%||99%|
|Overall Office Portfolio||n.p||99%||99%|
The operational performance of the office sector has remained resilient in both Singapore and Australia. In FY19 itself, Suntec REIT has:
- Completed its development works at 9 Penang Road in October 2019.
- Completed the acquisition of 55 Currie Street in September 2019.
As both these events happened towards the end of FY19, we would expect the corresponding full-year revenue to be reflected in FY20 performance. Similarly, in early FY20, Suntec REIT has also completed its acquisition of 21 Harris Street.
3. Relief measures to mall tenants
An area we would applaud the manager of Suntec REIT is its measure taken in relation to the Covid-19 pandemic. Due to the pandemic, many of the mall tenants are affected especially during the circuit breaker period. Given the circumstances, the REIT manager has stepped in to provide temporary relief measure to the tenants. Here is a summary of the relief provided.
- Waiver of rent from April 1 to April 30 2020.
- Passing down the savings from the property tax rebates received to all tenants in May 2020.
- One-month cash security deposit that mall tenants can use to offset rent.
No doubt there are definitely downsides to the following measures which are at the expense of the investors return. However, looking at it from a long term perspective, this would help retain tenants. In the case where no such relief is provided, it would have driven out some of the tenants given the economic condition. Nevertheless, it is still a question mark on the operational performance of Suntec REIT. Definitely area investors should keep an eye on upon the release of its half-year financial result.
4. A slight increase in revenue but a decline in net property income
|SGD in mil||31-Dec-19||31-Dec-18|
|Income from JV||98.6||91.2|
Looking at the financial performance of Suntec REIT, we notice a slight increase in revenue from SGD 363.5 mil in FY18 to SGD 366.7 mil in FY19. This is mainly from the contribution of 55 Currie Street which was acquired in September 2019. However, if you were to look at revenue from Suntec Singapore convention, there is a huge drop in revenue throughout the year.
Another area investor should note is on the declined in net property income. This is contributed by the higher property expenses incurred throughout.
A portion of the properties is owned through a joint venture. These are the income earned from properties which are not wholly-owned by Suntec REIT. Looking at the performance of these properties, it has increased from SGD 91.2 mil in FY18 to SGD 98.6mil in FY19.
5. Uncertainty of Covid-19 pandemic
The Covid-19 pandemic has definitely taken a toll on Suntec REIT. In fact, most REITs in Singapore are adversely affected. The performance of Q2 2020 in the Singapore region will likely be bad given the temporary relief provided to the tenants. However, with the end of the circuit breaker in 1 June 2020, we would expect a slight improvement for the Singapore market with the exception of the convention centre.
6. An expected increase in revenue from the 3 newly acquired properties
Late FY19, Suntec REIT has completed its acquisition and redevelopment works of 55 Currie Street and 9 Penang Road. As the acquisition was only made late last year, we are expecting recognition of full year revenue in FY20.
Furthermore, Suntec Reit has also completed its acquisition of 21 Harris Street early this year which will also contribute to the growth of the REIT. However, this expected increase will likely be offset by the decline in performance from the retail sector and convention building performance.
Gearing and Interest Coverage
7. Gearing level of 37.7% as at 31 December 2019
The Group’s gearing stood at 37.7% as at 31 December 2019 as compared to 36.7% on 31 December 2018. This is still below the threshold of 45% set by the MAS (with a recent announcement to increase the limit to 50%). This would still give them a slight headroom before hitting the limit.
The interest coverage ratio is, however, an area of concern to us. It has dropped from coverage of 3.3x in FY18 to 2.9x in FY19. Given the uncertainty in the market, this is definitely an area we will keep a close watch on in the coming quarters ahead.
Distribution and Price to Book
8. Declining distribution per unit (DPU)
The next aspect we will be looking at is the distribution per unit (DPU) of Suntec REIT. Looking at the DPU over 5 years, we note a declining trend of 10.002 in FY15 cents to 9.507 cents in FY19. It is however uncertain how much the DPU will be affected in FY20 from the impact of Covid-19. On the positive aspect, we would aspect a full-year contribution of the newly acquired properties in FY20.
9. Price to book ratio
The net asset value per share of Suntec REIT as at 31 December 2019 is SGD2.126. Comparing this to the closing price as at 31 December 2019, this would translate to a price to book ratio of approximately 0.87.
In summary, there is definitely a mixture of prospect in regards to Suntec REIT. On one hand, there have been a number of great acquisitions and on the other hand, the impact of Covid-19 would likely drag the performance of Suntec REIT. No doubt the performance for FY20 are expected to be adverse. It would be dependent on how Suntec REIT fair through the adversity post-Covid-19.
What are your thoughts on Suntec REIT? If you are just getting started, feel free to read more of our REIT Guide and REIT Analysis. You can also read more about what REITs are if you are new to REITs.