Is Suntec REIT (SGX: T82U)'s 30% Discount In NAV Attractive?


Suntec REIT (SGX: T82U) has recently announced its 3Q 2020 financial results. Its DPU was down by 21.9% to 1.848 cents. It is trading 4.7% based on its last traded price of $1.46 on 23 Oct.


Key Highlights:


  • Distribution per unit (DPU) and Dividend Yield (4.7%)

  • Price to book ratio (0.7)

  • Gearing (41.5%)

  • Interest coverage ratio (2.6x)

  • Portfolio occupancy rate (98%)

  • Growth catalyst


Background of Suntec REIT


Suntec REIT, a retail-commercial hybrid reit that owns the prime asset in Singapore, Suntec City, which also manages another 8 properties in Singapore (4 properties including Suntec City) and Australia (5 properties).


1. Distribution per unit and dividend yield


Net property income for third-quarter tumbled 19% to $47.3m. This was mainly due to the lower occupancy rate and rental waiver for its Suntec City assets.


Based on its latest price, the REIT is currently trading at about 4.7% dividend yield. Historically, the REIT has been paying very consistent DPU, with small growth over the years. However, due to the impact of Covid-19, Suntec REIT posted a drop of more than 28% in DPU year-on-year based on the 1st nine months results.


2. Price to book ratio


Over the past 8 years, Suntec REIT has been trading at an average price to book ratio os 1.01. The recent price correction due to Covid-19 has brought down the ratio to 0.7 (the lowest since 2013). The current level indicates a 30% discount based on its historical valuation.


3. Gearing


Portfolio leverage remains conservative at 41.5%, which is above our preference level of 38%. The debt tenor went down slightly to an average of 3.09 years. Its debt profile is well distributed over the years.


Suntec REIT's Debt Maturity Profile

4. Interest coverage ratio


The recent drop in DPU due to the pandemic has brought down the REIT's interest coverage ratio of 2.6 times, which is way below our preference of 4 times. The REIT maintains an low interest cost of 2.6%.


5. Portfolio occupancy rate


Portfolio occupancy remains high at 98%, which is well above the industry average. Most of its properties remain at almost full occupancy. This shows that its portfolio is well-positioned at a strategic location.

Source: Suntec REIT's First Quarter Financial Results Presentation

6. Growth Catalyst


The REIT manager says that it will be passing on government rental relief to tenants by 4Q2020. However, the REIT will not be providing further rent relief after that.


Its Australia portfolio remain resilient, supported by strong occupancy and long lease tenure. New contributions from the two assets, 477 Collins in Melbourne and 21 Harris in Sydney, will improve its overall property income.


The REIT will continue to manage risks proactively to enhance the resilience of our properties and undertake active capital management to strengthen the balance sheet.


Summary


In the near term, the REIT is unattractive at its current price level which offers a yield of less than 5%. However, the new contributions from new assets in Australia and the new acquisitions of UK properties might help to improve the REIT's DPU moving forward. We will continue to monitor the REIT closely.


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