Suntec REIT has been a standout performer, with its share price rising from about S$0.5 in the depths of the financial crisis to about S$1.90 recently.
With such a run up in prices, is there still room for growth in the future?
How will Singapore’s and Australia’s retail and office market performance impact the REIT?
This post looks through Suntec REIT’s 2Q 2017 results presentation and will make it simple for a first time investor thinking of purchasing the REIT or a seasoned professional looking to refresh on Suntec REIT’s performance.
Let’s get started.
Overall portfolio performance
Respectable 2Q2017 increase of 4.3% year on year in distributable income to S$66m.
For yield investors, annualized yield is 5.18%. Personally, I feel this is on the low side compared to 6% average for all S-REITs.
Financing cost is healthy at 2.41%, reflecting the low interest rate environment.
Occupancy for both the office and retail portfolios are healthy at 98.7% and 99% respectively.
After the asset enhancement initiative, Suntec City mall has registered healthy footfall growth of 11% on a year to date basis i.e. Total in the first 6 months of 2017 compared to the first 6 months of 2016.
Distributable income is up 4.3% year on year while distribution per unit is down 0.3%.
This is due to a bigger denominator (number of issued units) because of a principal amount of S$212 million of convertible bonds which were converted in May 2017.
No big issue with the exercise of convertible bonds as the DPU trend for Suntec REIT has been healthy.
Gross revenue and net property income are both up by 10.6% and 12.8% respectively.
Gross revenue is S$87.3m in 2Q2017, or about S$29.1m per month, while net property income is S$59.4m or S$19.8 per month.
Net property margin is 68%. This is not a deviation from industry standards so no red flags here.
As a recap, Suntec REIT’s joint ventures include One Raffles Quay, Marina Bay Financial Centre, Marina Bay Link Mall and Southgate in Australia.
The decline in JV performance is due to One Raffles Quay and MBFC.
No further information could be found for these 2 in this quarter’s slides but looking back, the JV performance is as follows
- 1Q17, JV performance was positive
- 4Q16, negative
- 3Q16 and before – no information on presentation slides.
Something to watch out going forward on whether the weak performance of joint ventures persists.
177 Pacific Highway was acquired in Aug 2016 and contribution to the portfolio has been healthy.
Suntec Singapore under the retail section refers to the convention centre. Performance in 2Q2017 was poor, pulling down the overall retail segment performance.
Historically, the revenue contributed by “Suntec Singapore” Convention Centre has been volatile. It tends to be higher during the fourth quarter of each year because of more events during the festive periods.
The office sector, composed of Suntec City Office, One Raffles Quay and MBFC Towers 1 & 2 in Singapore; 177 Pacific Highway and Southgate Complex in Australia contributes most of the net property income for the REIT.
Suntec REIT is predominantly an office REIT with ancillary retail assets.
In terms of asset concentration, Suntec City contributes 56% of the net property income to the portfolio. This suggests that Suntec REIT’s performance is tied closer to the Singapore office market than Australia.
Financial indicators
Leverage is healthy at 36.1% compared to the average of S-REITs at about 32-37% (depending on which research analyst you ask).
One concerning thing is the percent of fixed/hedged debt at 65%. Most other REITs hedge at least 85% of their interest rate or currency exposure.
As of 20 Sept 2017, NAV per unit of S$2.119 is a premium to the share price of S$1.87. This explains partly the low dividend yield of 5.1%.
I personally would wait for prices to drop to the S$1.5 or S$1.6 range which would equate to a dividend yield of about 6 to 6.3%.
Capital management
FY19 and FY22 are two years to watch with S$800 mil and S$700 mil of loans coming up due.
Generally, it’s better for loans to be due on a spread out basis e.g. 20% each over 5 years.
If there is concentration in one year, such as in FY19 and FY22, the REIT may have to pay a higher interest rate when they refinance the loans due in those 2 years.
However, if interest rates are low in those 2 years, the REIT will benefit as the refinancing is done at a lower interest rate.
Generally, REITs should not take on unnecessary risk or take a position on forecasting future interest rates, so it’s better if interest rate maturities are spread out.
Nevertheless, Suntec REIT’s management appears to be capable in managing the finances as seen from the next slide, so it should not be a worry that the REIT’s interest rates will rise much higher from the present 2.41%.
Office portfolio performance
Now we come to the brick and mortar of the portfolio.
The office portfolio consists of 3 Singapore office buildings – Suntec City Office, One Raffles Quay (owned 1/3) and MBFC Towers 1 & 2 (owned 1/3).
The Australia portfolio consists of 177 Pacific Highway and Southgate Complex (25% owned by Suntec REIT, 25% by PIP Trust and 50% by Dexus).
One concerning thing is the downtrend in Suntec REIT’s office occupancy. A peak was reached in 2012 when occupancy hit 99.9% but it has since fallen to 98.8% in Jun 2017.
Overall, the occupancy rate in 2015, 2016 and 2017 has been lower than in the previous 3 years as the Singapore economy slowed, office supply increased and major industries (banks and legal firms) reduced space needs.
On the upside at least the occupancy rate is higher than Singapore’s overall CBD Grade A figures.
Office occupancy at 98.7% is healthy.
For the remainder of FY17, there is only 3.8% of leases by net lettable area remaining to expire. A smaller number is generally better as the leases signed earlier in the year provides certainty of income to the REIT and its unitholders.
For FY2018, 2019 and 2020, the percentage of leases that are expiring are evenly spread out, so Suntec REIT should be able to take advantage by getting diversification in the rates new leases are signed at.
One point to note is the rents of S$8.79 for leases signed in the quarter. Depending on which broker you ask, market rents could be higher or lower than this.
If the market rent is higher, this means Suntec REIT lost out on signing a higher rental rate, and getting higher rental income. The converse is also true.
However, the 1.5% quarter on quarter increase in signed rents is a good sign. This could be due to the capability of the leasing team in negotiating terms favourable for the REIT or it could be the market generally picking up.
Retail portfolio performance
Similar to the office portfolio, the retail portfolio is dominated mainly by Suntec City Mall where it contributes 94% of the income to the portfolio.
Marina Bay Link Mall is next, contributing 4% of rental income. The remaining 1% is by Southgate Complex, a very minor portion of the portfolio.
Occupancy is healthy at 99%.
The shorter WALE of 2.19 years in the Singapore portfolio is balanced by the longer WALE of 6.56 years in the Australia asset. However, as seen earlier, the Australia asset contributes only 1% of the rental income, so the portfolio WALE is at the lower end of 2.3 years.
In the near term of 2017 and 2018, there are fewer leases expiring so risk is lower. 2019 and 2020 will be the years to watch when 32% and 26.4% of net lettable area respectively is going to expire. Key to the performance is where rents will be in those 2 years.
Good sign with occupancy, footfall and tenant sales all up.
Increase in tenants sales means that the landlord, Suntec REIT, will benefit, if rents are linked to performance of tenants. If not, it still is good because the tenants are in a healthy operational state and have lower risk of suddenly vacating the space.
Convention events
The following shows the events that were held in 2Q and 3Q 2017.
Notable shows include Santana, USANA and TechInAsia 2017.
Share price performance
Suntec REIT is presently trading at 5.35%. To me, this yield is not attractive enough for my requirement of about 6%.
That said, Suntec REIT is well run and backed by a strong management team that may explain its tighter trading yield.
I will personally enter at around the S$1.5 or S$1.6 range. Apart from the global financial crisis, the historical low of about S$1 at the end of 2011 would be my support level.
Suntec REIT delivered growing distributions per unit from 2005 to 2009, after which it fell in 2010 after the global financial crisis hit. Distributions per unit was flat for the next 5 years but has slowly picked up.
Could this be a reversal of Suntec REIT’s heyday? Possibly. And it could also be the reason why they are beginning to look to Australia where growth has been better than in Singapore.
Annualizing 1H17’s distribution per unit, it would seem that FY2017 DPU could fall from 2016’s level. When the news hit the markets, I may see that as an opportunity to enter if there is price correction.
Of course I would have preferred to see a rising distribution per unit trend but stability sometimes has its place in a portfolio.
Portfolio valuation
Suntec REIT’s portfolio valuation is dominated mainly by Suntec City Mall, Suntec City office and MBFC.
So that wraps up the overview of Suntec REIT’s 2Q2017 results.
If you like the post, keep updated on property developments by visiting and liking us at Facebook, Linkedin, YouTube, Telegram or subscribing to our mailing list.
For REIT investors, check out our REIT database with information on yields, dividends, prices and other important figures.