Bargain hunters — it’s time to hunt for cheap office assets.
Suntec REIT (SGX: T82U) is one of the cheapest Singapore commercial REITs right now:
- Suntec REIT — 0.75x P/B
- OUE Commercial Trust — 0.74x P/B
- Keppel REIT — 0.86x P/B
- CapitaLand Integrated Commercial Trust — 1.0x P/B
Today, Suntec REIT shares are stuck in the bargain bin — down 15.7% from its pre-pandemic price.
At the highest, Suntec REIT traded at S$2.15 per unit in 2017.
Source: ShareInvestor Webpro
A quick intro: Suntec REIT is a major retail and office landlord.
At market cap of S$4.3 billion, it owns the crown jewels — Suntec City Office Towers, Suntec City Mall and Suntec Singapore Convention and Exhibition Centre.
That’s not all.
Suntec REIT owns a 33.3%-stake in Marina Bay Financial Tower (MBFC) One and Two, a 33.3% stake in One Raffles Quay office building and the Marina Bay Link Mall.
And you might want to know this: Suntec REIT has a pretty strong backer — ARA Group. John Lim co-founded ARA Group in 2002 with the backing of Li Ka-shing, the richest man in Hong Kong. ARA Group helps manage Suntec REIT’s properties.
It’s impressive how ARA Group have grown over the last two decades. In my opinion, John Lim is an astute property investor and operator.
Now, Suntec REIT shares look cheap because Suntec REIT’s retail malls were wrecked by COVID. Its Suntec City Mall and Marina Bay Link Mall’s occupancy rate fell to 94.7% and 92.2% respectively.
That’s far lower than average retail occupancies across Singapore heartland malls and other central retail malls along the Orchard Road belt.
And because of COVID and people working from home (WFH), Suntec REIT’s office properties’ value have dropped over the last two years.
But what’s interesting is this:
Suntec REIT’s office rents have quietly soared
Actually, despite COVID and WFH, Suntec REIT’s office rents have rose from S$8.68 per square foot per month (psf/month) to S$9.25 psf/month. In fact, over the last 14 quarters, its office rent continued to achieve positive rent reversions.
Positive rent reversions mean tenants’ rent are renewed at higher rates.
Source: Suntec REIT FY2021 Presentation Slide
What’s more, the tailwind Suntec REIT is riding on is this — there’s little office supply in the CBD.
In its latest quarter results, management also said: “business outlook is expected to improve in tandem with economic recovery with demand driven mainly by the Technology and Financial Services sectors.”
If Suntec REIT can ride through COVID, execute their leasing strategies, they could see a strong rebound in their office leases.
In its latest 2021 results, Suntec REIT reported a pretty solid set of numbers.
Its distributable income grew 18% higher than last year — hitting S$247 million. Its distribution per unit (DPU) grew 17% higher to 8.67 cents per unit. This is driven by higher occupancy rate, and lower rent assistance.
Its office rental grew higher because of the recent acquisition of the Minister Building –contributing at least 10% to its revenues. Not too bad. Not too bad.
I mean, other than their retail shops, Suntec REIT’s offices are still high in demand.
The one big problem I’m seeing for Suntec REIT is this — its high gearing ratio.
I’m not afraid of Suntec REIT defaulting on their debt, or not meeting interest payments.
Their strong rent covers their interest payment easily.
In fact, over the last three years, Suntec REIT produced an average S$228 million of cash profits each year. And that more than covers its average annual interest payment of S$112 million a year.
But the thing is, because of their high gearing ratio…
It’s hard for Suntec REIT to expand their portfolio
Today, Suntec REIT has a gearing of 43%, that’s very close to MAS gearing ratio limit of 50%.
And that means, there’s little room Suntec REIT can do to grow its portfolio because they cannot borrow heavily from banks.
In fact, it’s hard for this major Singapore REIT to grow bigger, faster. Because that means Suntec REIT would hit past MAS gearing limit.
Of course, Suntec REIT could raise always more shares (equity). But that would severely dilute unitholders.
That’s why Suntec REIT is actively reorganizing their portfolio — selling less profitable properties, buying more overseas properties. Recently, they sold off all their Suntec Office strata units and a property in 9 Penang Road.
Strata units are individual office spaces owned by the tenants. Strata units make it hard to coordinate efforts to improve and renovate offices.
Last year, Suntec REIT bought The Minster Building in London at a 4.5% yield (pretty good location from the map below).
The Minister Building was developed in the 1990s. It’s an 11-storey grade-A office development with retail shops. This office building was refurbished in 2018. And has a 12 years lease expiry.
So far, the building comes with a 96% occupancy rate — with some of the biggest tenants including Charles Taylor, Spaces, Lyst, Trustpilot and ADM Investors.
Source: Suntec REIT Presentation Slides
After buying this London office building, Suntec REIT’s total assets will hit S$11.7 billion across 10 properties in Singapore, Australia and the U.K.
So far…
Suntec REIT is one of the cheapest Singapore REITs
Their high gearing ratio makes it hard for them to grow their assets. And their retail malls are still affected by COVID.
But what’s interesting is Suntec REIT’s steady dividend pay out and high quality office assets.
Over time, office assets are going to be valued higher once the pandemic is completely recovered — especially when companies start to bring back most of their employees into office.
Its dividend yield is trades at 5.4% today. If Suntec REIT can execute its office strategies effectively, its yield could trade back to its 2019 levels of 6% (based on 2019 DPS: 9.507 cents per unit).
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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