Suntec REIT 3Q2020 Financial Results

Suntec City

Suntec REIT 3Q2020 Financial Results have been released on 22nd October 2020. Suntec REIT used to be my favorite REIT but I have since sold it away due to lacklustre performance.

Many of us are familiar with Suntec City Mall and thought that Suntec REIT is a pure retail REIT. Suntec REIT is a retail and office REIT. Its portfolio comprises of office and retail properties in Singapore and Australia.

How has COVID-19 impacted Suntec REIT? Let us take a look at the latest 3Q2020 financial results.

In 3Q2020, Gross Revenue and Net Property Income (“NPI”) fell by 13.4% and 19.0% respectively.

Distributable income fell by 12.6% due to rental assistance for tenants in Suntec City Mall, Marina Bay Link Mall and Southgate Complex Retail. The weakness was partially offset by better performance and contributions from its Australian office portfolio and better performance at One Raffles Quay.

As such, a distribution of 1.848 cents was declared. This was a drop of 21.9% as compared to 3Q2019.

Suntec REIT 3Q2020 Financial Results

3Q2020
(S$’mil)
3Q2019
(S$’mil)
YoY(%)
Gross Revenue 79.6 91.9 (13.4)
Net Property Income 47.3 58.4 (19.0)
Distributable Amount 52.2 59.7 (12.6)
Distribution Per Unit (“DPU”) (cents) 1.848 2.133 (21.9)

Occupancy

Singapore office portfolio occupancy stood at 92.9% with only 5.1% of the leases expiring in FY20. Only 2% office space remains vacant.

Suntec REIT SG Office Occupancy 3Q2020

Suntec REIT SG Office Lease Expiry 3Q2020

Suntec Office Passing Rent psf ($) also seems to be on the rise over the last few quarters which is a good sign.

Singapore retail portfolio occupancy stood at 93.4% with 12% of leases expiring in FY20. 6.6% remains vacant. Rental reversion was -9.4% which implies there is more supply and demand is low.

Suntec REIT SG Retail Occupancy 3Q2020

Suntec REIT 3Q2020 Financial Results

The Australia office portfolio occupancy stood at 94.0% with only 0.5% of the leases expiring. 6.1% is vacant.

Suntec REIT Australia Office Occupancy 3Q2020

Suntec REIT Australia Office Lease Expiry 3Q2020

Debt

As of 30th September 2020, the gearing ratio stood at 41.5%. In my opinion, this is considered high as compared the debt by other similar REITs.

Weighted Average Debt Maturity stood at 3.09 years.

Current Dividend Yield

Based on the current share price of S$1.46 and FY19 full year DPU of 9.507 cents, this translate to a current dividend yield of 6.51%.

The actual FY20 full year DPU might be lower as we can also see DPU has fallen significantly over the last few quarters.

Suntec REIT Share Price 23 Oct 2020

Summary

Income contribution to Suntec REIT is expected to be significantly affected for FY20. I am less worried about the Singapore office portfolio as passing rent seems to be consistently improving and occupancy remains high. The Australia office portfolio looks weak with only 94.0% committed occupancy. In my opinion, 6% offices are vacant which is worrying.

At tough times like this, I am surprised by the proposed acquisition as this adds on more debt. The manager has proposed the acquisition of 50.0% interest in Nova North, Nova South and The Nova Building, comprising two high quality multi-tenanted office buildings with ancillary retail development.

Nova properties has a 100% committed occupancy with long weighted average lease expiry of 11.1 years.

The property has a Net Property Income (“NPI”) yield of 4.6% with estimated DPU accretion of 3.4%.

Is the manager trying to make up for the poor financial performance of its Singapore retail portfolio by calling this proposed acquisition in hope that the NPI and DPU can offset the decline?

The risk of investing into Suntec REIT seems high given the high gearing ratio and proposed acquisition that will add on more debt. Full year DPU under normal times had not seen any significantly increase.

Nevertheless if you can withstand the risks and bet on the recovery of its retail and office assets, this is a good time to buy given the weakness in share price.

I love shopping at Suntec City Mall but I shall give it this REIT a miss and road to recovery seems long!

Suntec REIT DPU Fell 27.7% Due to COVID-19

Suntec REIT DPU Fell 27.7% Due to COVID-19

On 22nd April 2020, Suntec REIT had released their financial results for 1Q2020 (1st January 2020 to 31st March 2020). Gross revenue fell 3.1% to S$86.9 million and distributable income fell 6.5% to S$55.1 million.

The decline was due to lower advertising and promotion income at Suntec City Mall and postponement or cancellation of events at Suntec Convention due to COVID-19. The decline of revenue due to the impact of COVID-19 was cushioned by better performance from Suntec City Office, Suntec City Mall, Southgate Complex and contribution from 55 Currie Street.

Distribution Per Unit (“DPU”) fell 27.7% to 1.76 cents from 2.192 cents. The manager had decided to retain 10% (S$5.5 million) of the distributable income in order to build cash reserve to assist the tenants to tide over the COVID-19 period. I am not surprise as this is the same strategy as what other retail REITs (same as SPH REIT) will do.

1Q2020 Financial Results

1Q2020
(S$’mil)
1Q2019
(S$’mil)
YoY(%)
Gross Revenue 86.9 89.7 (3.1)%
Net Property Income 54.0 58.2 (7.2)%
Distributable Amount 55.1 58.9 (6.5)%
Distribution Per Unit (“DPU”) (cents) 1.76 2.192 (27.7)%

Occupancy

As of 31st March 2020, the occupancy for Suntec City Mall stood at 98.3%. The overall committed occupancy for Singapore office portfolio stood at 98.8% while its Australia office portfolio stood at 97.7%.

I have noticed a slight decline in occupancy for both retail and its offices as compared to my last review. (Read more: Suntec REIT FY19 Distribution Per Unit Fell 4.8%)

Debt

As of 31st March 2020, the gearing ratio stood at 39%. Do note that due to the COVID-19 situation, the upper limit had increased from 45% to 50%. (Read more: New Measures To Help SREITs During COVID-19 )

Current Dividend Yield

Given the full year distribution of 9.507 cents pay out in FY19, this translate to a current dividend yield of 7.49%.

However, we all know that dividends will sure be cut in FY20. Thus, assuming Suntec REIT pays out a flat 1.76 cents for each quarter in FY20, this translates to an estimated dividend yield of 5.54% (1.76 cents x 4 quarters then divide by S$1.27).

Suntec REIT DPU Fell 27.7% Due to COVID-19

Summary

I have noted that Suntec City will be waiving the rents of all its retail tenants in April 2020. I am not sure if rental will be waived in May or June as well since Circuit Breaker has been extended to 1st June 2020. This does have an impact on distributable income in next quarter.

On a positive note, the office portfolio is less likely to be impacted by COVID-19 and passing rent is on the uptrend. From the chart below, you can see that the office portfolio makes up the bulk of the revenue as compared to retail.

Suntec REIT DPU Fell 27.7% Due to COVID-19

I have read about institutional investors buying Suntec REIT. I believe they also spotted the positive side of Suntec REIT which is the office segment. Without the COVID-19 situation, I believe Suntec REIT will perform well in FY20.

Nevertheless, taking situation of the price weakness (S$1.27), there is definitely a certain margin of safety and REITs such as Suntec REIT will recover over the long run.