Suntec Real Estate Investment Trust (Suntec REIT) and Mapletree Commercial Trust (MCT) share quite a few similarities between them. They are both major REIT with a large market capitalisation of around $4.7 billion – so big that they occupy the two spots of Straits Times Index reserve list. Both are hybrid REIT that owns major shopping malls other types of real estate assets including office and business parks.
As close industry peers, it makes an interesting case to compare and contrast their businesses in a bid to determine which is a better-quality company. Let’s take a closer look in this article.
Suntec REIT owns prime retail and commercial properties located in the Marina Bay and civic district of Singapore, which includes Suntec City (Office and Retail), Suntec Singapore, Marina Bay Financial Centre and One Raffles Quay. 15% of its portfolio assets are retail and office properties in key Australian cities: Sydney and Melbourne. Collectively, the properties are worth about $9.6 billion.
Source: Suntec 3Q 2018 Earnings Presentation
MCT’s assets comprise 5 properties including shopping malls, offices and business park located at the southern part of Singapore. Its crown jewel property has to be the largest shopping mall in Singapore – VivoCity, and Mapletree Business City, a modern integrated business hub with 1.7 million square feet of lettable area. Total asset value is worth $6.69 billion.
Source: MCT 2Q 2018 Earnings Presentation
Suntec assets are more diversified geographically compared to MCT’s as they are spread across two countries. MCT’s assets are all concentrated around the Alexandra and Southern Waterfront precinct which are slated for major re-development in the near future when the port terminals move to Tuas. As for Suntec, their properties are mainly found in the traditional business area in Marina Bay.
In terms of assets quality, I do not think they differ too much here, as both companies own prime office properties and some of the largest shopping malls in Singapore.
Suntec breaks down its tenants’ trade sector into office and retail portfolio. Under the office segment, the top 3 trade sectors are Banking, Insurance and Financial Services, Technology, Media and Telecommunications and Real Estate and Property Services which contribute 69.7% of Gross Rental Income. As for retail, 64.8% of gross rental come from Food and Beverage, Fashion and Accessories, Services and Others.
Source: Suntec Corporate Website
As for MCT, it shows the tenancy profile on a total portfolio basis. The top three trade sectors are Food and Beverage, Banking and Financial Services, Fashion which occupied 39.5% of the total Gross Rental Revenue.
Source: MCT 2017/2018 Annual Report
It seems that MCT has less concentration on any particular sector as its top three trade mix collectively contributes less than 40% of total rental revenue, compared to Suntec with more than 64% rental income received from tenants in the top three sectors.
Revenue and Net Property Income
For FY 17 ended Dec 2017, Suntec’s total revenue was $354 million. Net Property Income (NPI) was $244 million. This gives Suntec a NPI yield of 68.9%.
As for the latest 3Q 2018, revenue and NPI were $88.8 million and $56.6 million respectively, giving rise to an NPI yield of 63.7%. NPI suffered a 11.4% drop year-on-year (yoy) due to sinking fund contribution for Suntec City upgrading works and weakened Australian Dollar.
MCT’s total revenue and NPI for FY17/18 ended 31 Mar was $433 million and $338 million, hence an NPI yield of 78%.
Its 2Q FY18/19 revenue and NPI came in at $109 million and $86 million. NPI yield is thus 78.9%. It is worth noting that MCT’s revenue and NPI showed a 2.5% and 2.2% improvement yoy.
MCT has a higher NPI yield, with a growth in revenue and NPI in its latest quarterly earnings. This seems to suggest that MCT is operating and maintaining its assets more efficiently and churning out higher income yield.
Gearing and Interest Cover Ratio
We can’t avoid a discussion on Gearing and Interest Cover Ratio for REITs as these are key indicators on their ability to manage debts well to continue distributing dividends, especially in a rising interest rate environment.
Obtained from the latest quarterly earnings, Suntec’s Gearing is 38.6% while MCT’s figure was 34.8%. Interest Cover Ratio for Suntec is 3.4 times while the same figure for MCT is 4.5 times.
Overall, MCT shows a healthier picture in its capital management, with its lower Gearing and higher Interest Cover Ratio. If finance cost were to increase much from here, MCT would be in a better position to pay off its debts.
Net Asset Value
Suntec’s Net Asset Value (NAV) as at 30 Sept 18 is $2.08 per unit, while MCT has a NAV of $1.49.
Using the market closing price on 26 Nov, this would mean a Price to NAV of 0.84 and 1.08 respectively for Suntec and MCT.
It is clear that MCT is trading at a much higher NAV multiple than Suntec. Investors are perhaps much more positive about the quality of MCT assets and willing to pay a premium for its shares.
Using the 26 Nov closing price of $1.76 and $1.62, Suntec and MCT’s distribution yield would be 5.68% and 5.58% based on their latest financial year dividend.
From this article, we can deduce that Suntec is trading at a cheaper valuation than MCT due to its higher distribution yield and a discount to its NAV. However, MCT has a healthier balance sheet and a stronger NPI yield, with an improvement seen in the latest quarterly results.
However, looking at the past distribution, one would observe that MCT has a better history of increasing distribution in the past five years, while Suntec’s distribution track record over the same period has been largely stagnant.
Based on this, my vote would go to Mapletree Commercial Trust.