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REITs investing & personal finance

Sunday, July 12, 2020

Suntec REIT Analysis @ 12 July 2020

Basic Profile & Key Statistics
Suntec REIT derived its income from Office, Retail, and Hospitality sector. The above chart shows sector weightage by NPI. And NO, Suntec REIT does not own any hotel, but it owns convention centre. I've classified convention centres under Hospitality sector as its purpose is similar to event halls in hotels. Suntec REIT is currently 1 of the 5 stocks in STI reserve list.

Lease Profile
Occupancy is high at 98.7%. WALE is short at 3.09 years where its highest lease expiry of around 25% is in the year 2021. Weighted average land lease expiry is slightly longer than SREITs median.

Debt Profile
Gearing is high at 39.9%.  Cost of debt of 2.9% is at median level despite high unsecured debt of 90%. Fixed rate debt is low at 65% which is favorable in the current low interest environment. Interest cover is quite low at only 2.7 times. WADE is long at 3.36 years where its highest expiry of 30% is in FY2024.

Diversification Profile
Suntec REIT is not diversified in terms of geographical and property. 85.5% of its income is from Singapore properties. 56.1% of its income is from flagship Suntec City, excluding the income from convention centre. Both top tenant and top 10 tenants contributions are very low at 3.5% and 20.3% respectively.

Key Financial Metrics
Property Yield is very low at only 3.2%. As some of its income is from its joint venture, so the formula for property yield I used is (Net Property Income + Distribution from Associate/Joint Venture) / (Properties Valuation + Interest in Associate/Joint Venture). Management fee of 18.9% is not competitive, this translates into S$ 5.30 dividend for every dollar paid. Distribution margin is high at 55.8%. 7.4% of past 4 quarters distribution comes from the partial distribution of divestment from Park Mall disposal, which started since 1Q 2016. However, management never releases this distribution from divestment to support its DPU in the last quarter.

DPU & NAV Trend
DPU is on a slight downtrend for the past 5 years. DPU may improves once 9 Penang Road and 21 Harris Street start its contribution. NAV per unit more or less same for the past 5 years.

Fundamental Valuation
 Favorable  Less Favorable 
 Diversified Sector  WALE
 Occupancy Gearing 
 Unsecured Debt Interest Cover Ratio
 WADE Top Geographical Contribution 
 Top Tenant & Top 10 Tenants Contribution  Top Property Contribution
 Distribution Margin Property Yield
  Management Fee
As per previously mentioned in ART analysis post, I would prefer REITs to have their DPU derived from operation instead of asset disposal. 

Relative Valuation
i) Average Dividend Yield
Average value at 5.5%, apply past 4 quarters DPU of 8.833 cents will get S$ 1.61. If we take the DPU without retention for COVID situation, then DPU would be 9.029 cents, which translates into S$ 1.64
ii) Average Price/NAV 
Average value is at 0.85, apply latest NAV of S$ 2.057 will get S$ 1.75

Author's Opinion
As of now, there is still no detailed update regarding 9 Penang Road, it is initially expected to start occupancy at 2Q 2020. And the acquisition of 21 Harris Street would only boost 0.49% to its DPU, based on information provided in July 2019. For valuation:
i) Fundamental Intrinsic Value = (Removed)
ii) Relative Valuation - Dividend Yield = S$ 1.64
iii) Relative Valuation - Price/NAV = S$ 1.75
At the current price of S$ 1.44, it is undervalued in terms of relative valuation. However, as Suntec REIT is currently in the STI reserve list, its share price would definitely increase WHEN(or IF) it is included in STI. 

*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Please always do your own due diligence before any decision is made. 

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