Suntec REIT: Gearing up for the reopening

Suntec REIT has continued to achieve strong financial performance in 1Q2022, with 18.2% y-o-y increase in distributable income. Distribution per unit (DPU) of 2.391 cents in 1Q2022 grew 16.9% y-o-y driven by 8.3% y-o-y increase in distributable income from operations and a capital distribution of $5.8 million. The strong operating performance was mainly driven by new contributions from The Minster Building in London, and higher income from Suntec City Office and Suntec City Mall.

2. With a 16.9% y-o-y increase in DPU to unitholders in 1Q2022, how does Suntec REIT plan to sustain DPU growth for unitholders?

Suntec REIT will continue to exercise proactive lease management to enhance resilience and sustain revenue growth across our portfolio. Our office portfolio in Singapore is expected to remain strong, driven by the cumulative positive rent reversion achieved in the past 15 quarters, and the full impact of revenue from leases committed in FY2021. The major easing of restrictions and reopening of borders also increased optimism about the continued recovery of the retail and convention businesses compared to a year ago. Long lease tenures and strong occupancy across our overseas properties in Australia and the UK will also provide stability to support income growth.

3. How has Suntec REIT rebounded from the Covid-19 pandemic?

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Committed occupancy at most of our Singapore office properties has returned to pre-Covid-19 levels. Our office portfolio continues to be resilient, continuing 15 quarters of positive rent reversion on the back of limited supply in the market. Despite companies adopting remote work arrangements, demand for office space remained healthy. We are also seeing more tenants with expansion plans as compared to tenants with downsizing requirements. Despite tighter restrictions due to the Omicron variant, footfall at Suntec City Mall had recovered to around 65% of 2019 levels during 1Q2022 while overall tenant sales recovered at a faster rate to around 90% of 2019 levels. The major easing of Covid-19 restrictions from April this year is expected to further boost recovery of footfall and tenant sales.

Efforts to diversify revenue streams and control costs had also contributed significantly to narrowing losses in 1Q2022 for Suntec Convention. With the major easing of restrictions for Meetings, Incentives, Conventions and Exhibitions (MICE), bookings for corporate and consumer events have started to pick up and are expected to contribute to Suntec Convention’s business recovery in 2022. With the improved outlook across the portfolio, capital distribution that was put on hold due to the pandemic had resumed in 1Q2022.

4. How is Suntec REIT retaining existing and attracting new tenants in this challenging climate?

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We expect to renew about two-thirds of our retail leases in FY2022, enabling us to retain tenants that continue to do well, while introducing new brands and concepts to refresh the tenant mix and excite shoppers. Despite the major easing of restrictions, tenants continue to remain cautious due to rising operating costs and manpower shortages. Hence, a willingness to share risks and rewards between the landlord and the tenants is crucial to retain and attract new tenants. For example, we have accepted lower base rents in some instances, but negotiated for higher gross turnover rent to achieve a win-win situation for both landlord and tenants when tenant sales recover to pre-Covid-19 levels.

We have also strengthened the positioning of Suntec City Mall to have a stronger focus on food and beverage and activity-based concepts. This strategy is aimed at future proofing the mall against the threat of e-commerce and will help to attract a steady stream of visitors and shoppers. The asset enhancement works at Suntec City Office Towers, which commenced in late 2019, are now completed. The enhancements include the upgrading of the office lobbies, washrooms and lift lobbies, as well as a contactless building entry system with facial recognition technology. This major upgrading has strengthened the value proposition of Suntec City Office to retain and attract office tenants.

5. What is the outlook for the Singapore office portfolio?

The reopening of borders and major easing of restrictions is expected to support GDP recovery, which will in turn support the recovery of the office market. Singapore remains the preferred base for companies and demand continues to be driven by the technology and financial services sectors. Coupled with limited new supply and tightening of vacancies in the market, the Singapore office portfolio will remain strong, with high occupancy and moderate positive rent reversion.

6.What is Suntec REIT’s perspective on the recovery of its Singapore retail portfolio?

Although there is increased optimism from the major easing of restrictions and the gradual recovery of tourist arrivals, this optimism has been tempered by geo-political uncertainties, rising operating costs for both landlords and tenants, and consumer concerns over inflation. Despite an improvement in leasing demand, rent reversion is expected to remain weak as retailers adopt a cautious approach. Revenue recovery at Suntec City Mall is expected to be supported by higher occupancy, gross turnover rents and marketing communications revenue.

7. Please share some insights and outlook for Suntec REIT’s overseas portfolio.

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In Australia, recovery of the office market is underway as economic conditions and employment rate improve. While flexible work arrangements remain an option for most companies, more companies are encouraging staff to physically return to the office. Revenue from our Australia portfolio is expected to remain resilient, underpinned by strong occupancy, annual rent escalations and long lease tenures with minimal lease expiries in FY2022. In the UK, leasing demand in the West End and City of London has recovered to pre-pandemic levels. With their long lease tenures, strong occupancies and minimal lease expiries, revenue from our UK office portfolio is expected to be stable, with retail income protected by income support.

8. What is Suntec REIT’s acquisition strategy?

Suntec REIT will remain Singapore-centric and will continue its strategy of primarily investing in good quality, DPU accretive office assets located in international gateway cities. We also aim to grow our presence in existing markets and the overseas contribution to the REIT’s AUM is expected to be in the range of 30% to 40% over the next few years (currently at 29%).

9. Sustainability has been a growing priority for investors, how is Suntec REIT committed towards sustainability practices and creating value?

Suntec REIT believes in the importance of integrating Environment, Social and Governance (ESG) best practices into our business strategies and operations. In recognition of Suntec REIT’s sustainability leadership in 2021, Suntec REIT was awarded GRESB’s highest accolade of Global Sector Leader for the “Office-Listed” category and was ranked top in Asia (Office).

Suntec REIT also retained GRESB highest five-star rating. GRESB is one of the leading ESG benchmarks for real estate and infrastructure investments globally and the achievements were testament to our commitment towards sustainability practices, the positive impact made to the community and the environment as well as our investment in people. According to the World Economic Forum Global Risks Report 2022, climate risk has been identified as one of the top business risks in the next 10 years. To address this growing concern, Suntec REIT is conducting a climate scenario study on climate transition and physical risks, performing gap analysis to address climate change matters, and increasing our readiness to mitigate climate-related risks.

10. What is Suntec REIT’s value proposition to its shareholders and potential investors?

One of our key value propositions is the resilience of the REIT’s income stream. From being a pure Singapore focused REIT, our forays into Australia and UK had diversified and strengthened the REIT’s income stream. Currently, Singapore, Australia and UK assets constitute approximately 71%, 17% and 12% of Suntec REIT’s AUM respectively. The geographical diversification supports income stability in this dynamic and uncertain global environment.

In addition, close to 80% of our income contribution comes from our portfolio of office assets in Singapore, Australia and the UK. In the last two years of the pandemic, our focus on this stable asset class had proven to be the right strategy, which has helped strengthen the resilience of Suntec REIT’s portfolio. Suntec REIT’s efforts in active portfolio management have helped grow our AUM from $2.2 billion from IPO in 2004 to $12.2 billion today. We will continue to look for opportunities to divest lower yielding assets and acquire higher yielding, DPU and net asset value (NAV) accretive assets that fit into our overall strategy. At the same time, we will remain steadfast in our commitment to strengthen the balance sheet through active capital and portfolio management to deliver sustainable returns and longterm value to unitholders.

Emelia Tan is a research analyst with the Singapore Exchange