Original Post from THE SINGAPOREAN INVESTOR
From its property in Suntec City when it was listed back in 09 December 2004, Suntec REIT’s (SGX:T82U) portfolio has expanded to include multiple commercial properties in Singapore, Australia, as well as in the United Kingdom worth over S$12 billion as at 31 December 2022.
The Singapore-listed REIT is also among the 10 REITs that I’m currently invested in. Among the reasons why I have made the investment decision back in February 2020, based on the statistics between FY2012 and FY2019 (a period of 8 financial years) include:
- Consistent financial performances over the years, where its gross revenue and net profit income grew at a compound annual growth rate (CAGR) of 4.3% and 4.7%;
- Portfolio occupancy rate of its retail and office properties were maintained at around the 98-99% level throughout the 8 years I have looked at, which in my opinion is a very strong one;
- On its debt profile, gearing ratio is also very healthy, where it has been maintained at under 40.0%;
- Finally, in terms of its distribution payout to unitholders, I like its quarterly payout frequency, along with its stable growth over the years – from 9.49 cents/unit in FY2012 to 9.507 cents/unit in FY2019.
Following my investment in the REIT, its financial performance continue to record improvements. At the same time, its portfolio occupancy continue to remain strong (where occupancy rates of its properties in the various geographical locations are at least 90.0% occupied) in the subsequent years (from FY2020 till FY2022.)
The only issue is its debt profile – particularly its gearing ratio, at 42.4% as at 31 December 2022, is very close to the regulatory limit of 45.0% (the limit is as such because the REIT’s interest coverage ratio fell below 2.5x.) I have raised my concerns about this during the REIT’s latest AGM (in April 2023), and the response given by its CEO, Mr Chong Kee Hiong, was that there still remain an adequate debt headroom of around S$700m before reaching the regulatory limit of 45.0%. He clarified that should it rise to above 45.0% as a result of a decline in valuation of properties, the only constraint imposed was that the REIT would not be able to enter into new borrowings. He also shared that the Manager is actively looking at the potential divestment of mature assets in Australia to unlock value, with proceeds used to pare down debt and improve its balance sheet.
In spite of headwinds surrounding its debt profile, I have continued to remain as a unitholder of the REIT for the following reasons:
1. High Quality Properties in the REIT’s Portfolio
The first reason why I’m staying invested in the REIT is because of the quality of its properties in the 3 geographical locations:
- 55.7% interest in Suntec City Office Towers, 100.0% interest in Suntec City Mall, and 66.3% interest in Suntec Singapore Convention and Exhibition Centre (with its value up from the purchase price of S$2.4 billion to S$5.7 billion as at 31 December 2022 – up by more than 100%)
- 33.3% interest in One Raffles Quay (with its value up from the purchase price of S$0.9 billion to S$1.3 billion as at 31 December 2022 – up by about 44%)
- 33.3% interest in MBFC Properties, comprising of MBFC Tower 1 and 2, as well as Marina Bay Link Mall (with its value up from its purchase price of S$1.5 billion to S$1.8 billion as at 31 December 2022 – up by about 20%)
Not only are these properties located in Singapore’s downtown core and Marina Central Improvement District, they are also Grade A office buildings (for the case of Suntec City Mall, it is one of the most popular malls in the country, and Suntec Convention and Exhibition Centre is the ‘go to’ by many organisations for MICE events.)
Also, as you can see from the valuations, they have climbed by double-digit percentages from their respective purchase prices – with Suntec seeing the strongest growth in terms of valuation from their initial purchase price.
- 100.0% interest in 177 Pacific Highway in Sydney (with its value up from the purchase price of S$457.5m to S$645.4m as at 31 December 2022 – up by about 41%)
- 100.0% interest in 21 Harris Street in Sydney (with its value up from the purchase price of S$257.4m to S$272.0m as at 31 December 2022 – up by about 6%)
- 50.0% interest in Southgate Complex in Melbourne (with its value up from its purchase price of S$299.8m to S$337.7m as at 31 December 2022 – up by about 13%)
- 50.0% interest in Olderfleet, 477 Collins Street in Melbourne (with its value up from the purchase price of S$430.9m to S$433.3m as at 31 December 2022 – up by about 1%)
- 100.0% interest in 55 Currie Street in Adelaide (with its value down slightly from the purchase price of S$138.9m to S$130.5m as at 31 December 2022)
The occupancy rates of the 5 properties in Australia were all above the Nationwide CBD Office occupancy rate, to which the CEO mentioned during the recent AGM was attributed to the locations of these office buildings (which are all near transportation nodes.)
Some of the properties also came with some common amenities including bicycle park, along with a shower area for staffs (which were not only favoured by the tenants, and at the same time, commanded higher rental rates.) This was on top of the buildings receiving ‘Green Certification’ (to which the CEO highlighted that tenants these days have this as one of their criteria for rental.)
- 100.0% interest in The Minster Building in London (with its value down from the purchase price of S$666.0m to S$537.4m as at 31 December 2022)
- 50.0% interest in Nova Properties (with its value down slightly from purchase price of S$772.6m to S$741.7m at 31 December 2022)
The drop in terms of the valuation of the 2 properties were mainly due to a weakening British Pounds against the Singapore Dollar.
Apart from that, both properties have a very strong occupancy rate of above 96.0%, higher than the Central London Office occupancy of 91.9%, as well as having a long WALE of 9.5 years – which can be attributed to the properties located in the heart of City of London, as well as near transportation nodes.
2. Good Diversification between Singapore and Overseas
As far as the REIT’s property investment goes, I like it that it is Singapore-focused, and at the same time, having investments in other countries for diversification of income. As at 31 December 2022, 74% of its assets under management is in Singapore, remaining 16% and 10% in Australia and the United Kingdom respectively.
The main reason is because, Singapore is such a small country. As such, the number of acquisition opportunities available is also very limited. On top of that, a huge majority of the commercial properties in Singapore are leasehold.
This is unlike investing in overseas countries, where most are much bigger in terms of size compared to Singapore. Therefore, there are much more opportunities available for the REIT to expand its portfolio and in doing so, improve on its financial performance and returns to unitholders. Also, the overseas properties are mainly freehold, which are generally worth more compared to properties with leasehold titles.
3. Quarterly Distribution Payout Frequency
Last but not least, my preference is towards REITs that have a quarterly payout frequency – and Suntec REIT is one of the few Singapore-listed REITs that satisfies this criteria of mine.
No doubt the REIT is faced with several headwinds, including higher finance costs (as a result of rising interest rates), negative impacts of foreign currencies against the Singapore Dollar, along with rising energy costs (limited impact as most of the costs are passed through to the tenants) – but these are problems faced by the entire REIT industry in general.
Looking beyond the headwinds, I remain confident of the REIT’s ability to grow its revenue due to the high quality of the properties in its portfolio (in that they are Grade A buildings, as well as being strategically located near transportation nodes), along with the fact that all of the REITs’ properties have achieved a high occupancy rate – which provides some stability in terms of revenue contribution.
With that, I have come to the end of my post today to explain the reasons for staying invested in the REIT, and I hope you’ve found the contents presented above useful.
Disclaimer: This post was written in partnership with Suntec REIT. At the time of writing, I am a unitholder of the Singapore-listed commercial REIT. Do take note that all the opinions expressed above are purely mine for educational purposes only. You should always do your own due diligence prior to making any investment decisions.
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