The rationale for this stock research arises from my recent decision to invest in a reputable REIT with a consistent track record of cash distribution per unit (DPU). Another factor of consideration is the quality of the management in strategizing growth for the company. Suntec REIT seems to fit the bill and hence, this shall be my first analysis on this venerable SGX stock.
New chapter for Suntec REIT
Listed on 9 December 2004 on Singapore Exchange mainboard, Suntec REIT is the first composite REIT in Singapore, owning income-producing real estate that is primarily used for retail and/or office purposes. 2016 had been an eventful year as the company expanded its footprint in Australia and navigated through the soft retail market reasonably well. For 2017, the change of CEO of the Manager will herald a new chapter for Suntec REIT.
On 2 December 2016, it was announced that Mr Yeo See Kiat would retire as CEO with effect from 31 December 2016. Mr Yeo has been CEO of the Manager of Suntec REIT for 10 years and has steered the company through significant milestone events through the decade. Some of his notable achievements include overseeing the $410 million asset enhancement of Suntec City, divestment of Park Mall for $411 million and Suntec REIT’s foray into Australia.
On hindsight, the appointment of the new CEO, Mr Chan Kong Leong should be part of Suntec REIT’ succession planning. Prior to the promotion, Mr Chan was appointed as Chief Operating Officer on 1 June 2016. Mr. Chan was the Senior Vice President and Head of Regional Investment, Asset & Fund Management at CapitaLand Limited and was with the company since 2010. Prior to that, Mr. Chan was the Head of Corporate Finance, Investor Relations & Corporate Communications at GuocoLand Limited. He has held senior management positions over the last thirteen years.
Suntec REIT portfolio
In Suntec REIT, Mr Chan inherited an impressive asset portfolio. The Reit supremo portfolio comprises prime commercial properties in Suntec City, a 60.8% interest in Suntec Singapore, a one-third interest in One Raffles Quay, a one-third interest in Marina Bay Financial Centre Towers 1 and 2 and the Marina Bay Link Mall (the “MBFC Properties”) and 30.0% interest in Park Mall, all located within Singapore’s growth precincts, namely Marina Bay, the Civic and Cultural District, as well as within the Central Business District.
Suntec REIT also holds a 100% interest in 177 Pacific Highway, a landmark office development in North Sydney. On 4 November 2016, Suntec REIT completed the acquisition of an initial 25.0% interest in Southgate Complex, an integrated waterfront development which is located along the Yarra River in Melbourne, Australia.
The remaking of flagship asset – Suntec City – was completed in 2015, at a cost of $410 million. Recently, my family visited the iconic mall and I was deeply impressed by the refreshing changes, in terms of the vibrancy and the diverse retail offerings. Being strategically located in the Marina Bay Precinct within Singapore’s Central Business District, the management made a wise decision in enhancing this property, which caters to the needs of the working population from the five office towers within Suntec City and office buildings in the vicinity, the daily flow of tourists and locals, as well as the vast network of local and international delegates who convene at Suntec Singapore Convention & Exhibition Centre for exhibitions, seminars and conferences.
Park Mall divestment
Another key development was the divestment of Park Mall for S$411.8 million on 22 December 2015. In conjunction with the divestment, Park Mall Investment Limited, a joint venture company of which Suntec REIT has a 30% interest, has been set up to redevelop Park Mall into a commercial development comprising two office blocks with an ancillary retail component. Due to this divestment, the distribution per unit (“DPU”) of 2.596 cents for 4Q FY16 was 5.6% lower than 4Q FY15 DPU of 2.750 cents. Development works commenced in December 2016 and the building is scheduled to complete by end 2019 when the new office supply is expected to be limited. The land lease where the former Park Mall was situated has also been extended to 99 years.
The development is estimated to cost approximately S$800 million, and is undertaken through a joint venture with Singhaiyi Group Ltd, Haiyi Holdings Pte Ltd and Suntec REIT, with an interest of 35%, 35% and 30% respectively.
To capture market growth, Suntec Reit has deepened their presence in Australia with the acquisition of an initial 25% interest in the iconic Southgate Complex, Melbourne. They have also completed the acquisition of 177 Pacific Highway on 1 August 2016, a 31-storey A-grade state-of-the-art commercial tower in North Sydney.
The distributable income of S$253.7 million was 0.7% higher year-on-year. The DPU of 10.003 for FY16 was in-line with FY15 DPU of 10.002 cents. Gross revenue was $328 million, a slight decrease of 0.3% compared to last year. Income contribution from joint ventures declined 6.6% to $89 million year-on-year. The debt-to-asset ratio stood at 36.4% as at 31 December 2016 whilst the all-in financing cost was 2.28% for 4Q FY16.
The Singapore retail sector continued to face headwinds in the first quarter of 2016. In spite of this, the overall committed occupancy for Suntec City mall as at 31 March 2016 stood at a strong level of 98.7%. With the completion of the asset enhancement works for Suntec City, the retail contribution from Suntec City is expected to be stable.
Based on closing price of S$1.685 on 24 January 2017, the distribution yield was 5.9%. The current trading price of $1.70 is below the Net Asset Value/Net Tangible Asset of $2.138. Since the dark days of The Great Financial Crisis in 2009, the share price had galloped from a low of $0.65 to the current $1.70, reflecting its resilience. My slight concern is the amount of liabilities it took on – total current assets was $200 million vis-à-vis total current liabilities of $383 million. Nonetheless, I like this counter because of the management’s approach on asset enhancement initiatives and overseas expansion in Australia market. My entry price for this counter is $1.50, which will provide a distribution yield of about 6.7%.
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