Is There Still Value In Suntec Real Estate Investment Trust?

Listed in 2004, Suntec Real Estate Investment Trust (Suntec REIT) derives income from a portfolio of prime properties, comprising of a retail mall, office buildings, and a world-class convention centre in Singapore and Australia. Presently, Suntec REIT’s market capitalisation stands at S$ 5.2 billion as of 1 April 2019.

In this article, I’ll revisit its fundamentals, bring an update on its recent financial results, and its valuation figures based on its current price of S$ 1.95 per unit. As such, here are 11 key things to know about Suntec REIT before you invest.

• Suntec City
  (Occupancy Rate: Suntec City Office (98.6%) & Suntec City Mall (99.6%))
  Net Property Income (NPI) had declined 1.3% year-on-year to S$ 206.3 million in 2018 from S$ 209.1 million in 2017. This is because the fall in NPI from Suntec City Office has outweighed its NPI growth from Suntec City Mall. The NPI fall experienced by Suntec City Office was due to the transitory downtime as a result of replacement of its leases in the year. Overall, from a long-term view, Suntec City has reported its highest NPI of S$ 211.9 million in 2015 before experiencing minor falls in its NPI for the past 3 years. Still, it remains a key contributor of NPI to Suntec REIT as Suntec City has contributed 62.1% of the REIT’s NPI in 2018.
  
  
  

Source: Suntec REIT’s Annual Reports

• ⅓ Interests in One Raffles Quay (ORQ)
  (Occupancy Rate: 96.1%)
  NPI has fallen by 13.9% year-on-year to S$ 24.8 million in 2018 from S$ 28.8 million in 2017. It is a continuous fall from S$ 47.1 million in 2010. In 2018, ORQ has contributed 7.5% of Suntec REIT’s NPI and hence, is a small income contributor to the REIT presently.
  
  
  

Source: Suntec REIT’s Annual Reports

• ⅓ Interests in Marina Bay Financial Centre (MBFC)
  (Occupancy Rate: 99.9%)
  NPI has maintained at S$ 53.6 million in 2018 from 2017 levels. From a longer view, MBFC’s NPI had dropped from S$ 74.7 million in 2014 as a result of an absence in income-support starting from the year 2016. MBFC has contributed 16.1% of Suntec REIT’s NPI in 2018, thus, is the second largest income contributor to the REIT.
  
  
  

Source: Suntec REIT’s Annual Reports

• 177 Pacific Highway
  (Occupancy Rate: 100%)
  NPI had dropped 2.0% year-on-year to S$ 34.7 million in 2018 from S$ 35.4 million in 2017. It is due to a slight fall in the Australian Dollar (A$) against from the Singapore Dollar (S$) in that year. 177 Pacific Highway has contributed 10.4% of NPI to Suntec REIT, hence, is the third biggest income contributor to the REIT in 2018.
  
  
  
• ½ Interest of Southgate Complex
  (Occupancy Rate: 97.7%)
  NPI has increased by 76.7% year-to-year to S$ 12.9 million in 2018 from S$ 7.3 million in 2017. It is because, as of 31 May 2018, Suntec REIT has completed its acquisition of another 25.0% stake in Southgate Complex and thus, lifting its total interest to 50.0%. This property had accounted for 3.9% of Suntec REIT’s NPI in 2018.
  
  
  
• Group Profitability
  In a glance, Suntec REIT had recorded stable increments in distributable income, up from S$ 189.6 million in 2009 to S$ 266.8 million in 2018. In that period, Suntec REIT had ‘successfully’ kept its Distribution Per Unit (DPU) at around 10.0 cents per annum.
  
  
  

Source: Suntec REIT’s Annual Reports


However, it made little sense, doesn’t it? If you read the above notes, I believe, you’ll find that most properties had recorded lower NPI for the past 3 years. So, how is it possible for Suntec REIT to continue to record higher distributable income and maintain a stable annual DPU when its NPI is falling during the period?

The answer lies in checking out the composition of its DPU. Often, DPU consists of two key components:

– DPU from Operations.
– DPU from Capital.

Apparently, Suntec REIT has declared a fall in DPU from operations as it was in line with NPI falls from its major properties, particularly over the past 3 years. Hence, to maintain its overall DPU figures, Suntec REIT has raised its capital distributions (DPU from capital) to offset its shortfall in DPU from operations.

Source: Suntec REIT’s Annual Reports

• Balance Sheet Strength
  As of 31 December 2018, Suntec REIT has total debt outstanding worth S$ 3.53 billion and total assets of S$ 9.51 billion. Hence, it has a gearing ratio of 38.1%. Its weighted average debt maturity is 3.2 years. Its all-in financing cost is 2.82% a year. 75% of its debt is based on fixed interest rates presently.
  
  
  
• Growth Prospect 1: 9 Penang Road
  Suntec REIT is undertaking a development of a 10-storey building which is known as 9 Penang Road via a joint venture under the ratio of 35: 35: 30 where Suntec REIT owns 30% interests of the property. As I write, it had reached 60% completion of its construction and is to be completed by end-2019. The market valuation of its interest in 9 Penang Road is S$ 282.0 million.
  
  
  
• Growth Prospect 2: Olderfleet, 477 Collin Street
  Suntec REIT has 50.0% interest in Olderfleet, a 40-level state-of-the-art building located at Melbourne’s CBD area. As of 31 December 2018, its market valuation of ½ stake in Olderfleet stands at S$ 400.0 million and the construction of this building hits 52% as of 31 December 2018. The building has achieved 65.8% pre-committed occupancy and is planned to be completed by mid-2020.
  
  
  
• P/B Ratio
  As of 1 April 2019, Suntec REIT is trading at S$ 1.95 per unit. It has net assets of S$ 2.10 per unit. Hence, its current P/B Ratio is 0.93, which is above its 10-Year P/B Ratio of 0.79 presently.
  
  
  

• Dividend Yields
  In 2018, Suntec REIT has paid out 9.988 cents of DPU. Hence, its gross dividend yield is currently at 5.12% per year, which is below its 10-Year Average of 6.38% per year.
  
  
  

VIA’s Verdict

Suntec REIT has recorded a slight fall in NPI from most of its main properties. But, its stock price remained resilient as the overall DPU for Suntec REIT was kept at stable levels of 10.0 cents (boosted by an increase in DPU from capital). Looking forward, Suntec REIT has revealed that it will derive income from joint ventures where it holds 30% interest in 9 Penang Road and 50% interest in Olderfleet.

In terms of valuation, it is now trading at above average in P/B Ratio and below average in terms of dividend yields.

So, would you invest in Suntec REIT at S$ 1.95 per unit?

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