Suntec REIT (SGX: T82U) is one of the pioneer composite REITs in Singapore and has income-producing real estate mainly used for office and retail purposes. As suburban malls were among the first to benefit from the post-pandemic recovery due to the gradual reopening of malls and office workspaces, investors are now thinking if Suntec REIT is a good investment while we continue to ride on the recovery wave back to pre-pandemic levels.
Let’s take a deep dive into Suntec REIT’s track record, portfolio performance, and long-term growth catalysts as well as risks that investors should know about before investing.
REIT’s portfolio comprises office and retail properties in Suntec City, Suntec Singapore Convention & Exhibition Centre, One Raffles Quay, and Marina Bay Financial Centre Towers 1 and 2, and the Marina Bay Link Mall. Located in Singapore’s Central Business District, these places are often densely populated with working professionals that generate most of the induced income, vital to the performance of Suntec REIT.
Suntec REIT’s portfolio also comprises properties not only in Singapore but also in Australia and London, United Kingdom. At the moment, there are a total of 5 properties in Singapore, 5 in Australia, and 1 in London.
Despite the Covid-19 pandemic, the management has been very active in rejuvenating the overall portfolio with some divestments. In December 2020, Suntec REIT enhanced its economic resilience by diversifying its portfolio to acquire Nova Properties in London (NPI yield of 4.6%). Additionally, it divested 9 Penang Road and fully leased the office component on long tenure. Hence, the asset value was maximized through redevelopment with an NPI yield of 3.3%.
Slight Growth in Gross Revenue and NPI
|Year on Year Difference||1Q 2021||1Q 2020|
|Gross Revenue||S$87.1 million (+0.2%)||S$86.9 million|
|Net Property Income (NPI)||S$59.5 million (+10.2%)||S$54.0 million|
With retail REITs being hit the hardest last year due to the pandemic, the base was set pretty low and as such, there is a significant increase in the NPI by 10.2%. When we look at the Gross Revenue, it only increased marginally by 0.2%. All in all, this is definitely a good sign that Suntec REIT is recovering well with the economy and we can expect an even better 2H2021 with the full contribution from the newly acquired assets in Australia and the United Kingdom.
Gradual Recovery in Distributable Income and DPU
|Year on Year Difference||1Q 2021||1Q 2020|
|Distributable Income||S$58.1 million (+5.4%)||S$55.1 million|
|Distribution Per Unit (DPU)||2.045 cents (+16.2%)||1.760 cents|
The Distributable Income managed to grow 5.4% year over year when including the retained capital of S$5.5m in 1Q 2020. On top of the growth in Distributable Income, Suntec REIT has also managed to grow its DPU year on year by 16.2% to 2.045cents. With the newly acquired assets only contributing to Suntec REIT’s net property income, we can expect a much stronger recovery in 2H2021 with potential growth in DPU not only year on year but half on half as well.
Balance Sheet Health in Poor Condition
|As at 31 March 2021||As at 31 December 2020|
|Average Cost of Debt||2.40%||2.53%|
On top of the rough year for Suntec REIT, they have a very weak balance sheet with a high aggregate leverage of 44.4% coupled with a very low interest coverage ratio of 2.7x. On a brighter note, Suntec REIT has managed to drop its average cost of debt from 2.53% to a low 2.40%.
Just to put it into perspective, Suntec REIT’s total debt outstanding stands at S$4,877 million. This means that for every 0.01% drop in the cost of debt, Suntec REIT saves approximately S$0.4877 million. With the cost of debt dropping from 2.53% to 2.40%, this represents a drop of 0.13% or an estimated savings of S$6.3401 million or 0.223 cents in terms of DPU.
As we can see, there is an overall 5-year upward trend for Suntec REIT. This is due to the fantastic management that has been aggressively growing the portfolio through meaningful acquisitions and investments over the years across other countries. However, there was a dip in FY2018’s NPI due to the sinking fund contribution. If we exclude the sinking fund contribution of S$11.2m, the NPI would actually increase by 3.1% year on year.
There is also a huge dip in FY2019 due to the Covid-19 pandemic which heavily impacted the overall economy and retail sector. Taking aside the one-off black swan event, we can see that Suntec REIT has been doing well over the past few years and is set to continue that trend with its recent acquisition of other properties.
However, Suntec REIT does not have a very strong track record of consistently rewarding shareholders with an increasing amount of DPU over the past 5 years. Not to mention, there was a huge decrease in DPU due to the pandemic. With the recent acquisitions and divestments made, let’s see how Suntec REIT performs in 2H2021 and whether or not they can bounce back stronger after the hit due to the pandemic.
The 5-year trend shows that Suntec REIT did not manage to grow its NAV/share year on year consistently, other than from FY2018-2019. NAV/share is a very useful indicator when analyzing a REIT’s performance. Investors can use the NAV/share as well as DPU/share as indicators to determine if a REIT is truly bringing shareholders, increased value with acquisitions and divestments, or are they only doing that “on paper” and is really diluting shareholders.
Potential Growth Catalysts
Moving forward, investors should definitely consider if Suntec REIT has any potential growth catalysts. If not, this would mean that the REIT will start to stagnate and might not be as great of an investment as you think. Let’s cover a few potential growth catalysts that Suntec REIT might see in the near future as well as long term that can help grow the REIT.
Improved Upward Rental Reversion
With the Covid-19 pandemic stabilizing due to the rapid introduction of vaccines, anchor tenants with strong growth potential will continue to survive in real estates like Suntec City. Suntec REIT intends to renew leases for tenants in growth categories with lower base rents and higher GTO (Gross Turnover) rent to share the risk and reward as tenant sales and overall footfall improves over time.
The majority of these new tenants include those of the technology, media, and telecommunications industry, and 50-62% of such tenants can renew their leases. Such companies are expected to thrive during Covid-19 as they help companies adapt to work from home and adhere to social distancing measures. This is a potential catalyst for Suntec REIT’s growth, as seen from the improvement of the performance of tenant sales from the chart above.
Potential Pipeline from Strong Sponsor
ARA Asset Management (ARA) is a global integrated real estate fund manager and is one of the largest REIT managers in the region. It manages 18 REITs globally, including Suntec REIT, Cache Logistics Trust, and ARA US Hospitality Trust listed in Singapore, and Fortune REIT, Prosperity REIT, and Hui Xian REIT listed in Hong Kong. Since its delisting in 2017, ARA’s business has grown rapidly, achieving a gross asset under management (AUM) of SGD 119 billion as of 31 December 2020, far exceeding its target of SGD 100 billion by 2021.
This can be a potential growth catalyst for Suntec REIT as they are exposed to a huge portfolio of assets under its sponsor that can potentially be pipelined into the REIT. As we know from many REITs with strong sponsors such as Mapletree and Capitaland, it is definitely important to have a strong sponsor to help a REIT grow exponentially.
Acquisitions and Divestments
As with most REITs, the most common way to grow is through acquisitions and strategic divestments to help grow the portfolio’s total AUM. Let’s take a look at a few recent changes Suntec REIT is making to their portfolio and whether or not shareholders should be happy about it.
Acquisition of Grade A Office in London
The Minster Building, a Grade A Office building with ancillary retail (NLA of 293,398 sq ft) of 999-year leasehold from 24 October 1990 (968 years remaining) will be acquired at 100% interest by Suntec REIT. Strategically located within the City of London’s central business district, this would generate higher revenue for Suntec REIT. There is a 96.7% committed occupancy with a long WALE of 12.3 years, as well as a 2-year income guarantee for vacant spaces and retail leases and approx and 1-year income guarantee for coworking lease.
The acquisition is expected to be 0.7% NAV accretive and 3.6% DPU accretive, based on pro forma assumptions that the acquisition is funded from the divestment proceeds from 9 Penang Road and Suntec City Office strata units. If the acquisition is indeed NAV and DPU accretive for shareholders, I see it as a fantastic step forward as Suntec REIT continues to grow and expand its portfolio geographically. Not to mention the long WALE of 12.3 years, it will definitely improve the overall portfolio’s stability.
Divestment of Strata Units in Suntec City Office
As mentioned above, to help fund the acquisition of the Grade A Office in London, Suntec REIT is expected to divest Suntec City Office’s portfolio for S$197.0 million, 8.9% above the independent valuation. The divestment is expected to be complete in 3Q 2021. The key rationale for this divestment is to not only actively manage the portfolio to enhance shareholders’ value but also to realize value from capital appreciation.
Divestment of 30% Interest in 9 Penang Road
Suntec REIT is also selling its 30% interest in 9 Penang Road for S$295.5m to its existing Joint Venture partner, Haiyi Holdings Pte Ltd. The sale price is priced 5.7% above its valuation of S$931.8m. This represents a net gain of S$229m. The key rationale is also similar to why they sold the Strata Units in Suntec City Office, to actively manage the portfolio to enhance shareholders’ value as well as to realize value from capital appreciation.
|PB Ratio||Annualized Dividend Yield|
|Suntec REIT ($1.46)||0.71x||5.070%|
Taking a first glance at Suntec REIT’s current valuation, we can see that it’s being priced way below its book value, with a price to book ratio of 0.71x. On top of that, it is also paying an annualized dividend yield of 5.07% to investors. Based on historical averages, Suntec REIT is now trading at a huge discount with its PB ratio below -1SD and its dividend yield slightly above its -1SD.
Valuation v. Peers
|Suntec REIT's Peers||PB Ratio||Annualized Dividend Yield|
|Keppel REIT ($1.18)||0.91x||4.856%|
|OUE Commercial REIT ($0.405)||0.69x||6.000%|
|Mapletree Commercial Trust ($2.15)||1.25x||4.414%|
When compared to its peers, we can see that Suntec REIT seems like a great pick with the 2nd lowest PB ratio with the 2nd highest dividend yield, losing to OUE Commercial REIT in both comparisons. Despite that, I do prefer Suntec REIT over OUE Commercial REIT due to its strong performance over the past 5 years. Topped with a strong sponsor backing the REIT, we can expect Suntec REIT to only grow bigger over the next few years. Despite all this, I still prefer Mapletree Commercial Trust (SGX: N2IU) amongst the 4 REITs due to its fantastic performance and huge growth potential in the next few years to come.
Suntec REIT is definitely an interesting pick for both the retail and commercial sectors when we look at recovery plays. Trading at an attractive 0.71x P/NAV, below -1SD of its historical mean, investors are getting a great bargain at this recovery play. At the same time, while waiting for the price to appreciate back to fair value, investors are paid an attractive 5.07% yield. At this price, investors have priced in most of the negatives while they see Suntec recovering as the economy recovers.
However, there may also be a longer-than-expected economic recovery if a second wave of Covid-19 infections comes. As Suntec REIT’s portfolio comprises a higher composition of small-medium enterprises, such threats could increase risks of early lease terminations and reduced occupancies by tenants.
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