What You Should Know About Suntec REIT (SGX: T82U) At Its Share Price of S$1.87
Sudhan P●
Suntec Real Estate Investment Trust‘s (SGX: T82U) share price (technically known as unit price for REITs) is S$1.87 at the time of writing.
The REIT is generally well-known among investors as it owns one of the most prominent shopping centres in Singapore. Does that make Suntec REIT an attractive buy at its current unit price?
Let’s explore using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Before we start analysing Suntec REIT, let’s take a quick look at what its business is about.
Suntec REIT, as the name might suggest, owns properties in Suntec City, Singapore’s largest integrated commercial development.
In all, it has eight properties in its portfolio — four each in Singapore and Australia. The property count excludes a freehold Grade A office property in Sydney that’s about to be acquired (more on that later).
The following gives a snapshot of Suntec REIT’s Singapore properties:
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Suntec REIT has a financial year that ends on 31 December each year. The REIT just announced its FY2019 earnings results on 22 January 2020.
The following table shows how Suntec REIT’s gross revenue and NPI have been over the last five years:
| 2015 | 2016 | 2017 | 2018 | 2019 | Compound Annual Growth Rate (CAGR) | |
|---|---|---|---|---|---|---|
| Gross revenue (S$' million) | 329.5 | 328.6 | 354.2 | 363.5 | 366.7 | 2.7% |
| Net property income (S$' million) | 229.2 | 224.6 | 244.5 | 241.0 | 236.2 | 0.8% |
Even though NPI has grown from 2015 to 2019, it wasn’t a straight line increase. Nonetheless, Suntec REIT passes this criterion, although not with flying colours.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
From 2015 to 2019, Suntec REIT’s DPU performance has been dismal.
| 2015 | 2016 | 2017 | 2018 | 2019 | CAGR | |
|---|---|---|---|---|---|---|
| Distribution per unit (Singapore cents) | 10.002 | 10.003 | 10.005 | 9.988 | 9.507 | -1.3% |
DPU has fallen from 10.002 Singapore cents in 2015 to 9.507 Singapore cents in 2019.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For 2019, Suntec REIT had an NPI of S$236.2 million while its valuation of investment properties stood at S$6.88 billion. This translates to a property yield of just 3.4%.
Since Suntec REIT’s property yield is below the range of 5-9%, this criterion is a fail too.
Verdict: Fail
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, Suntec REIT had a gearing ratio of 37.7%, which is acceptable.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Suntec REIT’s interest coverage ratio, as of end-2019, stood at 2.9x, which is below my threshold of 5x.
Verdict: Fail
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Suntec REIT enjoyed healthy portfolio occupancy rates in 2019.
As of 31 December 2019, the committed occupancy for the Singapore office portfolio was 99.1% (above market average of 95.9%), and that of the Singapore retail portfolio was 99.5% (above market average of 98.2%).
Meanwhile, the committed occupancy for the Australia office portfolio stood at 97.8% (above market average of 91.9%).
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
Suntec City office and Suntec City mall contribute to the majority of gross revenue for the REIT. So, we’ll concentrate on those properties for the rental reversion check.
In its latest 2019 fourth-quarter, Suntec City office achieved seven consecutive quarters of positive rental reversions. The REIT said in its latest earnings release that “Suntec REIT’s Singapore office portfolio will continue to perform well driven by the positive rent reversions from the previous quarters”.
As for Suntec City mall, it achieved 10 straight quarters of positive rental reversions. For 2019, it clocked in positive 5.1% in rental reversions.
Verdict: Pass
8. Growth Prospects Check
Suntec REIT has a project under development and some buildings undergoing asset enhancement initiatives (AEIs) that could help grow its business in the years ahead.
The project under development is Olderfleet, 477 Collins Street, Australia. The property is a new 40 storey premium-grade office building that is expected to achieve practical completion by mid-2020.
Suntec City office towers one to four are currently undergoing upgrading works, and they are expected to be completed by 2021.
There’s also one property in Australia that’s waiting to be acquired, with a long weighted average lease expiry (WALE) of 10 years:
A project that was recently completed is 9 Penang Road (30%-owned by Suntec REIT) in Singapore. The property obtained temporary occupation permit in October last year and the office component has been fully pre-leased to UBS.
It will be interesting to watch how much the new projects and AEIs ultimately contribute to Suntec REIT’s DPU in the coming years.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Suntec REIT’s current unit price of S$1.87, it has a price-to-book (PB) ratio of 0.88.
Suntec REIT looks undervalued since its PB ratio is below 1. However, when compared against its five-year average PB ratio of 0.86, it seems fairly valued. I wouldn’t want to pay fair value for a REIT that has not grown much historically.
As Warren Buffett once said (emphasis is mine), “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Verdict: Fail
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Suntec REIT’s current unit price of S$1.87, it has a distribution yield of 5.1%. Even though the yield is just above my threshold, I’m wary of the falling DPU over the years.
Verdict: Fail
The Final Verdict
Suntec REIT has a final score of 5/10.
I’ll skip investing in Suntec REIT due to its lack of growth in NPI and DPU in recent history.
Also, although Suntec REIT has plans in place to grow in the coming years, I’m not sure how much growth I can expect from the REIT.
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Stock Discussion on Suntec REIT
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
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