Suntec REIT (SGX: T82U) has reported its Q2 2019 earnings, and at first glance, it seemed like a downbeat one, with gross revenue falling 2.3% year-on-year, net property income declining 7.2% year-on-year, and distribution per unit (DPU) coming down 4.6% year-on-year to 2.361 Singapore cents. As a recap, Suntec REIT owns commercial and retail properties in both Singapore and Australia, including Suntec City, a 60.8% interest in Suntec Singapore Convention and Exhibition Centre, and a commercial building in Sydney, among others.
However, looking closer at the numbers, a different picture emerges.
The weaker gross revenue was mainly due to Suntec Convention Centre hosting fewer major convention events, but this was offset by better contributions from Suntec City’s office and retail segments. Expenses were higher due to increased finance costs, but the additional income contributions from JVs offset almost all the decline, such that distributable income inched down by just 1.3% year-on-year.
Enlarged unit base affected DPU
The main reason, therefore, for the decline in DPU was the enlarged issued unit base, as Suntec REIT issued 111 million new units in April 2019 at S$1.80 per unit to raise gross proceeds of S$200 million. These proceeds were to be deployed for acquisitions, which were later announced in July for 21 Harris Street and 55 Currie Street.
The dilution was around 4.3% as the original number of units was 2,680 million, so the enlarged unit base is now around 2,791 million units.
Operational metrics remain robust
Suntec’s operational metrics are strong despite the weaker revenue from the convention centre. For the Singapore office portfolio, committed occupancy stood at 99.1%, as of 30 June 2019, while there was positive rental reversion for leases signed during the quarter. For the Australian portfolio, 177 Pacific Highway maintained 100% occupancy and Southgate Complex’s occupancy stayed high at 99.5%.
For the retail portfolio side, occupancy also remained high at 97.9%, while Suntec City mall saw positive rental reversions of 5.3% for H1 2019. Both footfall and tenant sales per square foot also rose year-on-year by 3.9% and 1.7% respectively.
Upgrading and development in progress
Upgrading works are ongoing for Suntec City Office Towers and will be fully completed by 2021. In addition, the REIT has a development in progress at 9 Penang Road (former Park Mall), which is on track to complete construction by Q4 2019. The office component for this building has been 100% pre-leased to UBS (around 381,000 square feet) and leasing for around 15,000 square feet of net lettable area for the retail portion is ongoing.
For Olderfleet at 477 Collins in Australia, pre-committed occupancy is at 82.5% to-date. The building is around 71% completed and is scheduled for completion in mid-2020.
DPU should improve over time
Q2 2019 seems like a minor blip for Suntec as its operational metrics remain strong, and there is continued robust demand for its office space. With the upcoming re-opening of 9 Penang Road (which will offer a host of exciting retail offerings), investors can expect contributions from this asset by end-2019. For 2020, Olderfleet in Australia will begin contributing rental income once completed. In addition, Suntec’s two new acquisitions should also begin contributing to rental income from Q3 2019 onwards, hence I am confident that DPU should improve over time for the REIT.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Suntec REIT.