Suntec REIT (SGX:T82U), with retail and office properties in Singapore, Australia, as well as in the United Kingdom, held its annual general meeting (AGM) for the financial year ended 31 December 2022 (i.e. FY2022) yesterday afternoon (20 April 2023), which I’ve attended in-person (as there is no option for unitholders to attend the meeting virtually.)

Suntec REIT AGM for FY2022 on 20 April 2023

I arrived at the meeting venue fairly early yesterday, and managed to get myself a good seat.

For the benefit of those who aren’t able to attend, in this post, you’ll find a summary of the presentation by the REIT’s CEO, Mr Chong Kee Hiong, response to 4 questions (about its debt profile, and also its distribution payout in the year ahead) I’ve raised during the meeting, along with those by fellow AGM attendees, along with results of the 5 resolutions put to vote during the meeting.

Let’s begin:

Presentation by Suntec REIT’s CEO, Mr Chong Kee Hiong

FY2022 Financial Performance:

  • Gross revenue and net property income went up by 19.3% to S$427.3m (FY2021: S$358.1m) and 24.0% to S$315.8m (FY2021: S$254.6m) respectively due to higher contributions from Suntec City Office, Suntec City Mall, and Suntec Convention, as well as The Minster Building (London), but offset by a weaker occupancy and absence of surrender fee received in FY2021 at 177 Pacific Highway (Sydney, Australia), and weaker AUD and GBP against SGD.
  • Distributable income saw a smaller improvement, at just 3.4% to S$255.5m (FY2021: S$247.2m), due to higher interest rates, along with 50% of asset management fees received in cash (compared to just 20% in FY2021) – where Mr Chong said the move was to prevent dilution to unitholders.
  • Income contribution by geography: Singapore (67%), Australia (21%), United Kingdom (12%)
  • Income contribution by sector: Office (75%), retail (22%), convention (3%)

Capital Management:

  • As at 31 Dec 2022, all-in financing cost went up to 2.94% (compared to 2.35% as at 31 Dec 2021), largely attributed to interest rates climbing to a high of 3.6% in the 4th quarter.
  • Aggregate leverage was at 42.4%, interest coverage ratio at 2.4x, with ~66% of borrowings hedged to fixed rates.
  • A 100bp increase in all-in financing cost will lead to a 1.68 cent impact to distributable income to unitholders.
  • On debt refinancing, Mr Chong shared that S$400m of borrowings due in FY2023 has been refinanced into sustainability-link loans – with that, 27% of the REIT’s borrowings are green loans.

Portfolio Performance:

Singapore Office:

  • Occupancy rates of Suntec City Office (99.9%), One Raffles Quay (100.0%), MBFC Towers 1 & 2 (94.1%) are higher than core CBD occupancy of 94.7%.
  • About 20% of leases (by net lettable area) are up for renewal per annum.
  • Singapore office portfolio achieved 18 consecutive quarters of positive rent reversion.
  • Outlook ahead is that demand is likely to soften, with rents expected to plateau. However, rental reversion is expected to remain positive, and management’s priority will be to retain tenant and maintain high occupancy.

Australia Portfolio:

  • Occupancy rates of 177 Pacific Highway (100.0%), 21 Harris Street (97.0%), Southgate Complex (92.3%), 477 Collins Street (99.5%), 55 Currie Street (100.0%) are higher than Australia’s nationwide CBD office occupancy of 85.8% – which Mr Chong attributes this to the assets in better locations (such as near transportation nodes), along with ‘end of trade’ facilities such as gym, bicycle parking area, shower area incorporated in its buildings – which attracts tenants.
  • About 10% of leases (by net lettable area) are up for renewal per annum.
  • On the management’s decision to re-evaluate re-development plans for Southgate Complex (where the plan was not to tear down and rebuild, but to build another office building on top of retail mall), Mr Chong said was due to the increase in cost of construction, along with unfavourable market conditions.
  • Outlook ahead is that nationwide CBD office vacancy is expected to continue to increase due to new supplies hitting the market, but demand continues to remain healthy for good quality office buildings with sound ESG credentials (where Mr Chong said tenants these days will overlook office buildings that do not have ESG elements incorporated.)

UK Portfolio:

  • Occupancy rates of Nova Properties (100.0%), and The Minster Building (96.7%) are higher than Central London office occupancy of 91.5%.
  • Both assets have a very long WALE, with 92.2% of the leases (by net lettable area) expiring in 2028 and beyond.
  • Outlook ahead is that the office market will be impacted by economic challenges (where, as long as there is no GDP growth, demand for office spaces will always be impacted.) REIT will remain proactive in lease management to ensure occupancy continue to remain high.

Singapore Retail:

  • Occupancy rates of Suntec City Mall (98.3%), and Marina Bay Link Mall (92.7%) are higher than secondary market occupancy of 89.7%.
  • About 20% of leases (by net lettable area) are up for renewal per annum.
  • Main tenants are food and beverage, and lifestyle tenants, with 70% of the leases being renewed leases – which implies they are doing well.
  • Footfall to the malls are now 85-89% pre-Covid (this is with about 45% of staff going back to offices, and tourist arrivals much lower), but tenant sales are now more than 110% compared to 2019.
  • Outlook ahead is that retail sales expected to slow due to a weaker GDP growth, but rental growth expected to be positive underpinned by an increase in tourist arrivals (where the REIT will intensify its efforts to attract tourist footfall to Suntec City), along with MICE events.

Suntec Convention:

  • 2nd half of 2022 saw a return of larger-scale events, and they are currently at about half of 2019 levels – with event mainly domestic consumer, and corporate events (such as AGMs, Annual Dinner and Dance.)
  • Full recovery is expected in 2024, and the REIT’s focus will be on events with better profit potential.

ESG Highlights:

  • Mr Chong shared that ESG is getting more important these days. While it does not equate to higher rent, but assets that do not have ESG elements incorporated will face difficulty in getting tenants.
  • However, as ESG comes with a cost, the REIT will go at a measured pace.
  • All 12 assets are Green Building certified, with Suntec REIT being awarded GRESB highest accolade of Global Sector Leader for Office-listed category for the 2nd year running, along with retaining the highest GRESB 5 Star rating.

Outlook Ahead:

  • Improvements in operating performance will be offset by rising interest rates (which Mr Chong said is beyond the REIT’s control as it is led by the Federal Reserve), weaker foreign exchange (against the Singapore Dollar), along with higher energy cost (though Mr Chong said it has come down a little recently.)
  • The REIT will continue to be proactive in capital management, and at the same time unlock value from asset enhancement initiatives and potential divestment of mature assets, along with exploring good quality, accretive assets, as well as remaining committed to sustainability practices.

Responses to Questions Raised by AGM Attendees

Questions I’ve Raised:

  • I highlighted concerns about the REIT’s current aggregate leverage level, at 42.4% as of 31 December 2022, being very close to the regulatory limit of 45.0%, to which Mr Chong said unless there is a further $740m decline in the valuation of properties in its portfolio, the aggregate leverage will not cross 45.0%. He added that even if it does, it means the REIT would not be able to take on further bank borrowings, but no penalties will be imposed.
  • On another question pertaining to the aggregate leverage level the REIT’s management is looking to maintain, Mr Chong said in normal situation, they are looking at maintaining an aggregate leverage of between 40-42%. However, in the current high interest rate environment, for prudence, the management is looking to maintain it at below 40.0%. With the current aggregate leverage above this target, they are looking at divesting some mature assets where their rental upsides are limited, and at the same time, are at a good valuation to realise profit.
  • Responding to the third question of mine on whether this is an opportune time to divest properties, considering valuations of its overseas properties have declined, Mr Chong said that some of the properties were bought at low prices back then, and even there is a dip in terms of their valuations currently, the REIT would still be able to profit from the divestment. Examples include 177 Pacific Highway (in Sydney, Australia), where it was bought at S$413m, but it is currently valued at S$712m – a 72% increase in valuation over time; Another property was Olderfleet, 477 Collins Street (in Melbourne, Australia), bought at S$429m, but it is valued at S$478m currently – a 11% growth in valuation. Regardless, Mr Chong gave his assurances that the REIT would not divest assets too cheaply, and should there be any material updates on the REIT divesting any properties, they would update unitholders accordingly.

Questions Raised by Other Unitholders:

  • Responding to questions on rationale for the REIT’s investment in overseas properties, Mr Chong said it was done to diversify its income streams, as well as better manage its risks. He shared that for leases in Australia, there is an in-built rental escalation in place, which helps combat rising inflation. For the leases in the United Kingdom, they have a long WALE of about 10 years (this is unlike a WALE of just about 3 years on average for leases in Singapore), which provides income stability.
  • The same unitholder expressed concerns over the REIT’s exposure to forex volatility, to which Mr Chong said the REIT is trying its best to mitigate this by taking on loans in local currency. On top of that, the REIT have also hedged 60-70% of income coming in for more certainty.
  • Another unitholder expressed concerns surrounding the United Kingdom at the moment (including Brexit, divisions within the country, along with cost of living crisis) may lead to its 2 office properties being adversely impacted. In response, Ms Chew Gek Khim, Chairperson of the REIT, explained the rationale of the REIT venturing into overseas assets was that yields were much better compared to assets in Singapore. On top of that, WALEs were also typically much longer, providing income stability. However, she noted the concerns, and assured the unitholder that the management is constantly re-evaluating after studying the developments of the situation in the country.
  • Responding to a question on how Suntec City can generate synergy with surrounding malls (such as Marina Square, Millennia Walk, and Raffles City Singapore), Mr Chong shared that there is a ‘business improvement district committee’ set up, with Suntec REIT co-chairing the committee, to look at how to bring in more visitor footfall (locals, as well as tourists) to the malls. He added that the recently completed office building at South Beach Tower have a bridge linked to Suntec City, where staffs working there will cross over to the mall during meal hours. The same can be said for Guoco Mid Town, and Shaw Tower (both properties currently under development), where they will have bridges linked to Suntec City, which will bring about a further rise in footfall and tenant sales (and as such, bring about an increase in rental income for the REIT) when the developments are completed.
  • Addressing a question on why the REIT’s current liability is more than its current assets in its balance sheet for FY2022, Mr Chong explained this was due to debt due for refinancing within the next 12 months, which he updated that S$180m of refinancing had been done, with the rest due towards the end of the year – but financing have already been secured to refinance the borrowings.
  • Finally, the same unitholder wanted to know about the status of lease renewals for Southgate Complex (where about 23% of the leases by net lettable area are due for renewal this year), as well as for 55 Currie Street (where about 51% of the leases by net lettable area are due for renewal this year as well.) On this, Ms Dawn Lai, COO of the REIT, updated that for the former, 60% of the leases expiring (which was about 13% by net lettable area) has been renewed, with the remaining 10% currently under negotiation (and she expressed her confidence on securing lease renewal.) For the latter, Ms Lai explained that about 41% of the leases was attributed to a government tenant vacating the premises after leasing it for many years, and request for proposals have been sent out to look for interested parties to take over the vacated space.

Results of Resolutions Put to Vote during the AGM

  • Resolution 1, which was to receive and adopt the Report of the Trustee, the Statement by the Manager, and the Audited Financial Statements of Suntec REIT for the year ended 31 December 2022, and the Auditors’ Report thereon, was passed with 99.87% of the votes for, and 0.13% of the votes against.
  • Resolution 2, which was to appoint Ernst & Young LLP as the External Auditors of Suntec REIT and authorise the Manager to fix the External Auditors’ renumeration, was passed with 99.81% of the votes for, and 0.19% of the votes against.
  • Resolution 3, which was to authorise the Manager to issue Units and to make or grant convertible instruments, was passed with 91.00% of the votes for, and 9.00% of the votes against.
  • Resolution 4, which was to approve the General Mandate for Unit Buy-Back, was passed with 99.88% of the votes for, and 0.12% of the votes against.
  • Resolution 5, which was on the Proposed Third Party Fee Supplement to the Trust Deed, was passed with 90.22% of the votes for, and 9.78% of the votes against.

Related Documents

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

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