Results of Suntec REITs 2Q09

SUNTEC REIT announced its results on 30 Jul. 2Q09 results were above expectations with a 6.6% YoY increase in 2Q09 DPU to 2.98 cents. Revenue was up 8.9% YoY underpinned by higher rents achieved for Suntec City and Park Mall properties. Suntec City was the main contributor, generating 87% of the Total Gross Revenue for 2Q09. Closing price for Suntec on 30 Jul was $1.1 and Div Yield is 11.8%

Current Situation

Office

Office sector is the major contributor for Suntec REIT however there has been downward pressures on the rental rates for office supply as demand continues to drop. Occupany rate for 1H09 stood at 94.8% as compared to 99.4% for 1H08. Passing rents for Suntec City office average about $6/sq ft, marginally below the spot transaction of $6-7/ sq ft. The managment has stated that this is clearly still a tenant market and the focus on tenants' retention is paramount. I believe that in view of this, the management will focus on optimisation of the occupancy rate at the expense of rental rates and it is unlikely that rental rates will revert to an upward trend anytime soon.

Retail

Retail space occupies 36% of Suntec REIT portfolio but they contribute to 53% of the total revenue of 2Q09. This segment has remained resilient over the economic downturn and is a key support for Suntec REIT performance thus far. Occupancy rate remain at 98.4% for 1H09, not much difference compared to the 98.9% figure in 1H08.

Macro business forecast (2009 - 2011 )

The office sector will remain to be under downward pressures for the foreseeable future due to the completion of new commercial block, increasing the overall supply of lettable office space amidst a declining demand. For Suntec to maintain its edge, it will have to consistently managed the office space through renovation and upgrading the facilities to attract and retain tenants.

The retail sector will be received a huge boost in the coming years given the completion of the two circle line at Esplanade and Promenade together with the launch of the IR at Marina Sands. These projects will strongly enhance the traffic flow at Suntec City and will be a key driver for the retail segment.

Finally, the lack of debt obligation till 2011 will free the management from any worries for the short term.

Strategies for the future




I extracted this diagram from the management presentation. As shown, Suntec REIT key to growth will be to identify possible areas for key development or for acquisitions. This will help to solidify Suntec REIT competitive advantage in this area. However, one key challenge for this will be to balance between acquiring/developing spaces that will encroach on its current portfolio of buildings.

Factors affecting value of REITs

Most often than not, people like to highlight the factors to showcase the attractiveness of an investment. Well, I believe one should look at the risks facing the investment and by understanding the risks involved, one will be able to appreciate if the investment is worth buying.

Warren Buffet two most famous advice to his shareholders are: (1) Dont lose money in investment. (2) Dont forget the first rule. For most of us who cant monitor the market properly, it is important to understand your investment so that you can sleep peacefully at night. Dont get too distracted by the noises formed in the market, as they only serve to create disillusion and fear and indirectly cause you to make irrational decision.

Back to the topic on REIT, i have identified four factors that will affect the valuation of REITs. Will attempt to briefly explain to you what each of this means and how they affect the value of the REITs independently.

1. Asset Value: Also known as Net Asset Value (NAV), the NAV of REIT is a reflection of the current market value of the property. During boom times, REIT trade at a premium over the NAV while during bearish crisis, they tend to trade at a discount. A REIT trading many times above the normal industry average of NAV will trigger some concerns about it being over-valued while a REIT trading at a discount to its NAV may either signal that the REIT is in trouble or it is a true value play.

2. Rental Income: How much a REIT can distribute every quarter will really depend on how much rental income it collects. Rental rates is a true reflection of the demand and supply of different asset types (commercial space vs retail space vs industrial space). During a financial boom, demand for office space is strong, demand outstrip supply and the rental rates climb. This is good news for investors as they can expect higher distribution rates per quarter. However, the same is true for economic downturn as one can expect rental income to fall due to falling demand. However, certain asset class are more resilient and within the asset class, certain REIT will perform better due to factors such as quality of the asset, the accessibility etc.

In short, the understand the direction of the rental rates, one will have to look at the macro environment to understand how resilient the asset class is in different economic conditions and also to factor in the conditions of supply and demand and how they will unfold over time.

3. Occupany rate: This is related to rental income too. Occupany rate reflects the amount of space that is being taken up for retail/commercial purpose for a property. The higher the occupany rate, the better it is for shareholder. However, one has to understand the intricate balance between achieving a high occupancy rate versus a higher rental income.

For instance, rental income per sq ft may be high but if occupany rate is too low, it could mean that the company is losing money due to over-valuation of its properties. Conversely, a 100% occupancy rate with a lower than average rental income may mean that property space are being under-value. For asset manager, they have to do a difficult job of balancing this two factors to optimise the value of the property being used.

4. Debt refinance: This is the make or break factor for most REITs. REIT needs financing for expansion or acquisition plan. However, such financing are usually short-term notes / credits from the bank lasting 2-3 years. After which, the asset management firm will have to source for new credit line. From the perspective of banks, they will look at a few factors to identify if the asset management firm can make its repayment.

Factors such as the value of the underlying real estate assets, the trend in property values and for the particular property type and outlook for the sector. Egs, oversupply of apartment units or growth of online retail are factors that will negatively impact the value of the REITs in these areas. Finally, the management ability and capacity to successfully operate the entire portfolio of properties and real estate will determine if the banks are willing to refinance their loans.

Thus, many a times, investors will look at REITs that have secure a new refinance plan and that they do not have any financial obligations within the next 2-3 years as a sign that the company is stable.

Thats' all for today post on REITs. Before I go, I have extracted this list of datas from an analyst reports and it is for your viewing pleasure. Enjoy.

Suntec Reit: An Introduction

My first foray into REITs was to purchase Suntec Reits. During the early Mar 09, sentiments were at all time lows and I was really seeking to purchase defensive equities to hedge myself during an economic downturn. With some guidance from my stock broker as well as some personal research, I started with 2 lots of Suntec Reits.

This first post on Suntec REIT is to give a reader a basic understanding of the Suntec REIT business model.

Introduction

Suntec REIT deals mainly with office and retail properties. The properties under its belt include Suntec City Mall, Suntec City Office Towers, Park Mall, Chjimes an Raffles Quay. As of March 2009, Suntec REIT has $5.4 billion of assets under management, comprising approximately 1.9 million sq ft of office space and 1.0 million sq ft of retail space.

Accessible location being its key advantage.

The attractiveness of the properties managed by Suntec REITs is that the properties are all located in the Central Business District. Park Mall is located along Orchard Road, right next to Dohby Ghaut MRT and the NEL as well. Chjimes is a retail, F&B outlet that is recognised as a UNESCO site and has strong heritage value. Suntec City is Singapore 2nd largest retail mall and has 1.3 million Prime grade A office space of 1.3 mil ft. Finally, One Raffles Quay is locate at the Heart of CBD and has excellent connectivity to Raffles Place MRT and it has strong tenant base comprising of international and local blue chip financial institutions.

The business structure of SUNTEC REIT is as follows:

Ever since its inception, Suntec REIT has produced consistent growth in its distribution per unit and this is a sign that the business model is sustainable and scalable.

That is all for the first post on Suntec REIT. The next post will discuss about macro and business outlook for the REIT and highlights some of the key challenges facing the compay in the short term.