Suntec REIT (SGX:T82U) held its 11th annual general meeting (AGM) on the morning of 16 June 2020.

The meeting was held online due to the current Covid-19 outbreak in the country. As a unitholder of the REIT (I have invested in the REIT since end-February 2020), I have tuned into the virtual AGM to learn about the latest updates from the management.

For the benefit of those who weren’t able to attend the meeting, in this post you’ll find a key summary of the presentation by CEO Mr Chong Kee Hiong:

Key Highlights of FY2019

Financial Performance:

  • Gross revenue inched up 0.9% on a year-on-year (y-o-y) basis to S$366.7m (FY2018: S$363.5m) due to stronger performance in Suntec City, along with initial contribution from 55 Currie Street, partially offset by weaker performance of Suntec Convention and 177 Pacific Highway
  • Net property income however, edged down 2.0% compared to last year to S$236.2m (FY2018: S$241.0m) due to a higher sinking fund contribution of S$19.3m (FY2018: S$11.2m); excluding that, the REIT’s net property income would have been up by 1.3% on a y-o-y basis
  • Distributable income to unitholders saw a 1.5% y-o-y dip to S$262.7m (FY2018: S$266.8m) due to lower capital distribution
  • Finally, distribution per unit for FY2019 was down by 4.8% y-o-y to 9.507 Singapore cents/unit (FY2018: 9.988 Singapore cents/unit) as a result of an enlarged unit base, along with a lower capital distribution compared to the year before

Acquisitions in FY2019:

  • 55 Currie Street in Adelaide completed in September 2019, which has an occupancy rate of 91.7% and an initial 8.0% yield
  • 21 Harris Street, Pyrmont, Sydney completed in April 2020, which has a 66.2% committed occupancy (but Mr Chong added that the REIT will have no problem in filling the vacancies as the property is located in a prime location), with an initial yield of 5.5%

Debt & Interest Profile (as at 31 December 2019):

  • Aggregate leverage ratio: 37.7%
  • Weighted average debt maturity: 3.1 years
  • All-in financing cost: 3.1% p.a.
  • Interest coverage ratio: 2.5 years
  • 75% of its borrowings are on fixed interest rates, and 30% of the REIT’s AUD income have been hedged in 2020 (Mr Chong shared that the REIT is looking to hedge about 50% of its AUD income one year ahead)
  • As far as the REIT’s debts expiring in FY2020 is concerned, Mr Chong shared that all of them have been refinanced in the first quarter of the year 2020, with no more debts expiring in the rest of the year

Portfolio Occupancy Profile:

  • 68% of the REIT’s FY2019 net property income and income contribution comes from its office properties, with the other 28% from retail, and the remaining 4% from convention
  • 84% of the REIT’s net property income and income contribution comes from Singapore, with the remaining 16% from Australia
  • Singapore Office Portfolio:
    • Achieved overall occupancy rate of 99.1% as at 31 December 2019 (which is higher than the overall CBD occupancy of 95.9%)
    • Suntec City Office is 100% occupied, with under 14% of the leases due to expire in 2020 (out of which, 43% of the expiring leases have been renewed as at 31 March 2020)
    • One Raffles Quay (ORQ) is 97.8% occupied, with 25% of the leases expiring in FY2020 (out of which, 15% is from space to be vacated by UBS in December 2020, where they will be moving into 9 Penang Road, another property of Suntec REIT; also, 18% of UBS’ space has been pre-committed at ORQ)
    • MBFC Properties’ committed occupancy is 98.4%, with 5.6% of the leases expiring in FY2020
    • 9 Penang Road has obtained TOP in October 2019, with its office component 100% leased to UBS, and retail trade mix to be pre-dominantly F&B
  • Singapore Retail Portfolio:
    • Committed occupancy rate of 99.5% as at 31 December 2019 (higher than the secondary market occupancy rate of 98.2%)
    • Suntec City Mall is 99.6% occupied, recorded a 3.3% y-o-y increase in its footfall, and a tenant sales growth of 0.7% on a y-o-y basis (compared to FY2018); the REIT’s recent AEI works in Basement One yielded a high return on investment of about 50%
  • Suntec Convention:
    • While the number of events went up from 1,609 in FY2018 to 1,837 in FY2019, its revenue, compared to last year, decreased as the events held in the financial year under review are smaller
    • Mr Chong also shared that in even years, revenue from the Suntec Convention will be higher compared to the odd years due to bigger, biannual events being held in those years
  • Australia Portfolio:
    • Overall office portfolio occupancy rate is at 97.8%, higher than the nationwide CBD occupancy rate of 91.7%, and the REIT’s Southgate Retail occupancy rate is at 92.8%
    • 177 Pacific Highway in Sydney is 100% occupied, with no leases expiring till the year 2023
    • Southgate Complex in Melbourne has its office properties being 100% occupied, and its retail properties being 92.8% occupied; Mr Chong also shared that 7.2% of the property’s leases are due to expire in the year 2020
  • Project under Development: 477 Collins Street, Australia:
    • The property has a pre-committed occupancy rate of 93.7%, with key tenants currently undergoing renovation
    • Mr Chong shared that the property is a yield-accretive one since post-acquisition, with 4.8% initial yield, and a 5-year rent guarantee on vacant spaces

Impact of Covid-19 on Suntec REIT’s Properties

Singapore Office Portfolio:

  • Mr Chong shared that the REIT’s office portfolio remains resilient due to its diversified tenant bases
  • In light of the social distancing measures to curb the spread of Covid-19 in the offices, Mr Chong opined that companies may need even more office spaces as a result
  • As to the possibility of company relocation, Mr Chong explained that as companies are more concerned about their cashflow, they are less likely to want to relocate at this point in time due to costs involved (particularly in renovation), and this presents an opportunity for the REIT to retain their tenants (which will be their focus in the year ahead, where they will be doing more forward renewal of tenancies expiring in the year 2021)
  • Additionally, Mr Chong also updated that property tax rebates granted by the Singapore government will be fully passed on to their tenants, with qualifying SME tenants receiving an additional rent relief of 1 month as mandated
  • Finally, he also shared that the REIT has since renewed 52% of the leases expiring in FY2020, and this brings about fundamental support to the REIT’s office revenue in the year ahead

Suntec City Mall:

  • Mr Chong is of the opinion that the mall will face strong headwinds for the rest of the year, as a result of Covid-19
  • Gradual recovery is expected to happen from 3Q FY2020 as the Singapore government relaxes the safe distancing measures, and people return to the malls once again
  • No doubt the mall’s retail sales volume may be affected by the lack of tourists (as short-term visits to Singapore is still not permissible), Mr Chong shared that it is partially shielded as its primary catchment is predominantly office workers and local residents
  • As far as providing assistance to tenants is concerned, Mr Chong updated that apart from being granted waivers to all of them, they can also make use the ‘SME Help Fund’ by ARA, Straits Trading, and JL Family Office to borrow at lowered interest rates. On top of that, qualifying SME tenants will also be allowed to defer their rental payments (with regard to this, Mr Chong re-assured unitholders that it will not lead to bad debts, as requests will be evaluated on a case-by-case basis)
  • Having said that, Mr Chong added that most of the tenants will remain sustainable with help by the Singapore government
  • Finally, he shared that Suntec City Mall is the first in Singapore to do a live stream with influencers to sell products of their tenants. He added that such live streams are already very popular in China, and he is expecting this to receive similar response in Singapore

Suntec Convention:

  • Income contribution by Suntec Convention will be significantly affected due to the cancellation of MICE (Meetings, Incentives, Conferencing, Exhibitions) due to Covid-19
  • Currently, Suntec Convention is closed till 02 August 2020, and the REIT may extend the closure should the mandated measures are extended
  • Mr Chong shared that the REIT’s immediate focus is to focus on the upscaling of staff and innovation in preparation for recovery in 2021 and beyond

Australia Portfolio:

  • Mr Chong expressed optimism in terms of revenue contribution from the REIT’s office properties in Australia, due to their long lease expiries on tenancies, and the fact that 87% of its office properties are leased to large corporations, government tenants and businesses in sectors that are expected to be negatively impacted
  • However, for its retail properties, Mr Chong expects a dip in its contribution due to rent assistance for qualifying SME tenants (mandated by the Australian government)
  • On the whole, Mr Chong’s view is that the REIT’s overall income from its Australia portfolio will see an increase in 2020 (as compared to 2019) due to contributions from 21 Harris Street and 477 Collins Street

Main Concerns Highlighted by Unitholders of the REIT

Apart from the presentation, Mr Chong also addressed two main concerns brought up by unitholders – the REIT’s acquisition strategy ahead, along with capital management:

Acquisition Strategy:

  • Mr Chong said that moving forward, the REIT will continue to look to acquire properties in Singapore (where it contributes a lion’s share towards its net property income), but having said that, he shared that it may be difficult to acquire yield-accretive assets due to the high valuations of Singapore properties
  • At the same time, he updated that the REIT is also keeping its options open in acquiring yield accretive properties in other geographical locations (which Mr Chong shared that these locations must have a stable economy, currency, and growth) including Seoul and Tokyo in Asia, as well as London, Paris, and key cities in Germany in Europe
  • He also added that the REIT is leveraging on ARA Group’s strong presence in the various countries to help them source for yield accretive acquisition opportunities

Capital Management:

  • Mr Chong shared that there still remains some headroom available (of about S$2b) based on the new gearing ratio of 50.0%
  • He also reassured unitholders that the REIT have no problem when it comes to securing funding from the banks, due to its good reputation, along with quality assets under its portfolio. Also, investors in the market are continuing to provide support Suntec REIT for growth and as such, the REIT will not have any cashflow problem

Closing Thoughts

Personally, I felt that Mr Chong gave a very detailed presentation, which allowed me, as a unitholder, to learn more about the REIT – which I hope that after reading the summary above, you too have a much understanding about it as well, in terms of challenges the REIT is facing (particularly relating to Covid-19), along with its plans to navigate through them.

To conclude, I have every confidence in the management team of Suntec REIT to navigate the REIT through the Covid-19 pandemic and emerge stronger at the end of it.

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Disclaimer: At the time of writing, I am a unitholder of Suntec REIT.

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