Should You Invest In Suntec REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Suntec REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Information Is Accurate Up To Jan 2024

Business Description

Suntec REIT is an office & commercial REIT that was listed in 2004 and owns 12 properties across Singapore, Australia and the United Kingdom.

What I Like About Suntec REIT:

• Flagship properties such as Suntec City, One Raffles Quay and MBFC properties are solid properties that have proven resilient in terms of their top-line revenue. (Figure 1)
  

• Overall portfolio occupancy across retail and offices has been very stable over the years.(Figure 11)
  

What I Do Not Like About Suntec REIT:

• Capital management has been badly handled and the debt profile is not desirable with a high gearing ratio and deteriorating interest cover ratio. (Figure 4 & 5)
  

• Distribution per unit is partially supported and artificially inflated by non-recurring items such as a capital distribution from divestments and income support as well as non-cash accounting methods via management fees paid in units. (Figure 7)
  

• Distribution per unit from operations has not recovered to pre-COVID levels despite a resilient top-line performance largely due to poor capital management and the impact of a higher interest rate environment. (Figure 7)
  

Updates From Recent Performance (FY 2023)

General Comments:

• Suntec REIT divested $94.4million of strata units at Suntec City Office Tower to pare down their debts during 2023 and they are thinking of another $100million divestment to further reduce their gearing ratio.
  

• DPU dropped by 19.7% in 2023 as compared to 2022 on the back of higher borrowing and operational costs. (Management is still paid a performance fee despite the poor performance)

Positive Headwinds:

• Rent reversion in Singapore office properties coupled with the continued recovery of tourism in Singapore is going to help improve the top-line contribution from local properties.
  

• The cost of debt should remain stable moving forward as not much refinancing will be required moving into 2024. Which, by 2025, interest rates should have come back down to the levels that Suntec REIT is currently borrowing.

Negative Headwinds:

• Economic slowdown and higher vacancies coupled with a strengthening SGD against a weakening foreign currency may result in headwinds in overseas property’s performances.

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore