Mapletree Commercial Trust and Suntec Reit Analysis – The Battle of Diversified Reit

It’s always been in my plan to write an analysis for Mapletree Commercial Trust (MCT) and Suntec Reit (Suntec) when I started this blog in December 2018. However, I was procrastinating and have forgotten about it till now.

As both MCT and Suntec have exposure in retail, they are laggard behind other REITs such as Industrial. MCT and Suntec are down 22% and 28% YTD respectively. Is it time to invest in either of them? In this article, I will be analysing one of the most reputable diversified REITs in Singapore. 

Sponsor

The sponsor for Suntec and MCT is ARA Asset and Mapletree Investments respectively. 

ARA manages about $88 billion worth of properties worldwide as of 31 December 2019. It also manages listed and unlisted real estate investment trusts and private real estate infrastructure funds in 28 countries, which include Suntec Reit in Singapore, Fortune Reit, Prosperity Reit and Hui Xian Reit in Hong Kong. 

On the other hand, Mapletree Investments Pte Ltd is the sponsor for Mapletree REITS. Mapletree Investments owns and manages $60.5 billion of office, retail, logistics,  industrial, data centre, residential and lodging properties as of 31 March 2020. Mapletree currently manages four Reits listed in Singapore and five private equity real estate funds that own properties globally. One such example of Mapletree’s private equity real estate funds will be Mapletree Global Student Accommodation Private Trust which invests in student accommodation in United Kingdom and United States.

Portfolio Overview

Suntec 1

Suntec manages $10.5 billion worth of properties in Singapore and Australia. In Singapore, its portfolio comprises Suntec City, 60.8% interest in Suntec Singapore Convention and Exhibition Centre, 33% interest in MBFC Properties that consists of One Raffles Quay, Marina Bay Financial Centre Towers 1 and 2 and Marina Bay Link Mall. It also holds 30% interest in 9 Penang Road. 

Suntec 2

In Australia, it owns properties worth about $1.6 billion in Adelaide, Melbourne and Sydney. Its portfolio comprises 177 Pacific Highway, 21 Harris Street in Sydney. It also owns 50% stake in both Southgate Complex and Olderfleet (under development) in Melbourne. Lastly, it also owns 55 Currie Street in Adelaide. 

MCT1

MCT is a Singapore-focused REIT that invests in commercial and properties. As of 31 March 2020, MCT owns five properties in Singapore valued at $8.92 billion, namely Vivocity, Mapletree Business City, PSA Building, Mapletree Anson and Bank of America Merrill Lynch Harbourfront.

Occupancy Rate

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MCT’s occupancy rate remains stable amidst the pandemic. Actual occupancy as at 30 June 2020 is 97.1% which is stable compared to one quarter ago. We understand that due to the pandemic, some retail tenants might not want to extend their lease, we saw that in the latest quarter where Vivocity’s actual occupancy rate stands at 98.3% compared to 99.6% one quarter ago. Occupancy rate at Vivocity remains resilient considering the fact that it is strategically located with no other shopping malls as competitors. 

Other properties of MCT show better improvement of occupancy rate, be it Actual and Committed as at 30 June 2020 shows the management ability to retain or look for new tenants in this pandemic.

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Suntec City Mall and Marina Bay Link Mall are two shopping malls that are under Suntec. In the latest financial result, it is reported that occupancy rate for Suntec City Mall and Marina Bay Link Mall are 96.3% and 98% respectively. Compared to one quarter ago, occupancy rate for both malls were down 2% each from 98.3% and 100%. However, its overall occupancy rate of 96.4% is still higher than the secondary market occupancy rate of 95.8%. 

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Similar to MCT’s commercial properties’ occupancy rate, there’s not much to worry during this pandemic. Occupancy rate at Suntec’s offices remains resilient especially for MBFC Towers 1 &2 and 9 Penang Road compared to one quarter ago. Suntec City Office and One Raffles Quay saw a slight dip in occupancy rate of 98.1% and 98% compared to 98.7% and 98.2% recorded one quarter ago respectively. Overall occupancy rate of 98.6% is still higher than the overall CBD occupancy rate of 93.3%

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Suntec started to diversify into the overseas market as early as 2013 when it acquired 100% interest in a freehold land to be developed into 177 Pacific Highway for about A$413 million. The property was 100% pre-committed upon the acquisition proposal. Leighton took head lease of 76% of the NLA of the Property with an average WALE of 10 years.  Leighton also provided rental guarantee for four years over any vacant space upon practical completion of the property. However, it was fully leased out to tenants with WALE of 9.25 years upon practical completion. 

At Southgate Office, occupancy rate remains resilient amidst the pandemic. Occupancy rate stands at 99.7% in the latest financial result, the same recorded in the previous financial result. This is the same for its retail sector where occupancy rate stands at 92.8%, similar to what’s recorded in the previous financial result. 

Suntec acquired 50% of 477 Collins Street in 2017. It is scheduled to be completed in mid-2020. Upon practical completion, there will be a 5 year rental guarantee on any unlet space by Mirvac. As of the latest financial result, 93.7% of the NLA has already been leased out with additional 3.5% with Heads of Agreement.  

It was only recently when Suntec started to deepen its presence into Australia with 2 acquisitions – 21 Harris and 55 Currie within 2 weeks in 2019.

Suntec announced its acquisition of 21 Harris in 2019. Its pre-committed occupancy as of the latest financial result is 68.7% with Publicis Groupe as anchor tenant. The Property had achieved practical completion on 2 April 2020. There will be 3 years rent guarantee on unlet office spaces post practical completion.

Occupancy rate for 55 Currie stands at 91.7% which counts key government agencies such as Commonwealth Government, South Australian Government, Allianz and Data Action as tenants. There are also 27 months worth of rent guarantee on vacant spaces.

Lease Expiry

MCT3

 

In the latest financial result release, MCT disclosed that its overall WALE by Gross Rental Revenue stands at 2.6 years. Its office and business park portfolio has a higher WALE of 2.9 years is higher than the retail portfolio of 2.3 years. 

MCT has 12.3% of its leases expiring in the current financial year, with retail portion contributing 5.6% of Gross Rental Revenue. I believe that 5.6% of Gross Rental Revenue expiring from retail is manageable for the management given the fact that Vivocity is strategically located and a popular shopping mall in Singapore.

In addition, about 49% of the leases will expire in 2 years from 2021. It is not unexpected as MCT has a low WALE of just 2.6 years. However, with MCT having a solid portfolio under the belt, one must be confident in believing that the management will steer through the storm to deliver good returns for unitholders.

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Suntec’s retail portfolio consists of Suntec City Mall and Marina Bay Link Mall, with the former the flagship asset of Suntec. Suntec fared poorer than MCT when comparing Suntec retail portfolio WALE with MCT’s. Suntec’s retail WALE currently stands at 2.18 years while MCT’s figure is slightly higher than 2.3 years. The comparison isn’t meaningful as the difference is quite insignificant.

However, one has to take extra caution on the 20.6% of leases that will expire this year compared to MCT’s 5.6%. In addition, unitholders have to take note that about 60% of Singapore retail NLA will expire in the next three years.

Unitholders have to question what attracts Suntec City Mall and Marina Bay Link Mall that encourages tenants to renew their leases, considering that working from home is a norm and both malls are located at CBD.

Suntec 6

One shouldn’t worry too much on Suntec’s office portfolio especially for outstanding leases expiring in 2020. This is because only 7% of Singapore Office NLA is expiring this year and 10.3% has already been completed. As discussed earlier, there’s no interesting insight when comparing the WALE of MCT and Suntec’s Office WALE as both figures are in line with typical office leases of 2 to 3 years. One has to take note that about 50% of office NLA will be expiring in the next three years till 2022, this is compared to MCT’s 35.5% of leases expiring during the same period.

Suntec 8

As different countries have their own leasing style, it is fortunate that  Suntec decided to diversify into Australia which has longer leases. Its WALE stands at 5.53 years which is significantly higher than Singapore’s 2-3 years. As the WALE for its Australia portfolio is longer, only 11% of its leases will expire in the next three years till 2022 and 35.7% will expire in 2023. 

 I am a fan of higher WALE as having higher WALE means that the management does not need to find tenants thus providing stability in rental income. However, the con of having a longer WALE is that if the REIT will miss out any opportunity of rising market rental rates unless there are rental review in the lease. 

Top 10 Tenants

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Suntec 9

Suntec 10

The Top 10 Tenants figures by Suntec and MCT are 21.3% and 27.9% respectively. It is interesting that Suntec decided to split its top 10 tenants by trade sector. However, upon close examination, one would realise that the metrics that Suntec is using is Gross Rental Income. The retail tenants did not make it into the top 10 tenants if we were to combine both sectors together. 

Just by looking at the three images of Top 10 Tenants by Suntec and MCT, we can get insight that it is actually the offices that are contributing to the top 10 tenants numbers. 

For example, 9 out of 10 MCT’s top tenants are mainly for offices with only NTUC Fairprice contributing 1.7% of gross rental income.  On the other hand, Suntec’s retail tenants especially for its supermarket tenant which only contributes 0.9% of gross monthly rental income did not make it into the combined top 10 tenants list.

From the example above, it shows the importance of having a diversified tenant base. Especially for MCT, even though 9 out of 10 of its tenants are offices, contributing 26.2% of gross rental income , it is important to note that prior to the pandemic, retail contributes 43% of MCT’s gross rental income. On the other hand, retail only contributes less than 30% of Suntec’s net property income. With a more diversified tenant base, REITs can reduce its risk of putting all eggs in one basket.

Balance Sheet

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Suntec 11

In this section, we will take a look at the financial health of the REITs. Debt is very important for REITS and investors as this is one of the few methods that REITS finance to acquire properties. We will look into several indicators such as Gearing Ratio and Interest Coverage Ratio. 

One should be concerned about the Gearing Ratio of Suntec. It is currently standing at 41.3%, a significant increase from 6 months ago when it was just at 37.7%. The increase can be attributed to Suntec issuing two Euro denominated medium term note. On the other hand, MCT’s gearing ratio remains stable and at a comfortable level of 33.7%. It has inched up slightly due to the negative revaluation of its properties. 

A lower gearing ratio will always be preferred when evaluating REITs as REITs are leveraged instruments. In April, MAS raised the leverage limit from 45% to 50%. This is so that REITs have greater flexibility to manage their capital structure amid the pandemic when their property valuation falls. MAS also deferred its leverage limit requirement of minimum ICR of 25 times to 1 January 2022. This leads me to the second financial indicator of Interest Coverage Ratio. 

Interest Coverage Ratio means how much times its EBIT can cover the Interest Expense. It also determines how easily a company can pay interest on its outstanding debts. Therefore, a higher Interest Coverage Ratio will be preferred. Suntec’s ICR is at a dangerously low level of 2.7x, compared to 4.1x from MCT. Both REITs have their ICR ratio dipping every single quarter. Unitholders should be worried of Suntec rising leverage ratio close to 50% with EBIT falling due to lesser revenue collected during the pandemic, this means that there’s a higher chance of issuing rights to bring down its leverage.

Actions taken by Suntec and MCT for Covid 

In February, MCT announced its first tenant support package worth $11 million to support its retail tenants in mitigating the impact of Covid-19 outbreak. Rental rebates of up to half a month had been granted on a case by case basis. In order to drive more traffic, Vivocity also implemented free weekday parking for shoppers during lunch and dinner hours. In addition, the management also included support for advertising and promotional events, and giving tenants the flexibility to operate shorter store hours as part of an initiative to support its tenants during this period. 

MCT enhanced its tenant support package by committing additional $18 million worth of rental relief for its retail tenants affected by the pandemic. Deferment of payment of fixed rent for April was offered. The enhanced package was on top of the additional property tax rebates announced by the Government, which was fully passed on to eligible tenants. Together with the support from the Government, the enhanced and existing support package, retail tenants were offered about 2.5 months of rent rebates. 

The third round of Rental Waiver Support replaces the deferment of payment announced earlier in the $18 million rental relief package. With this package, eligible tenants would receive in total of 3.5 months of rental rebates, which includes approximately 1.1 months of property tax rebates announced by the Government. 

Lastly, MCT announced its final support package worth $6 million. Management raised its rental rebate during phase one of reopening for eligible tenants from 50% to 100%. In totality, management and the Government has given eligible tenants 4 months of fixed rent waiver from March to July 2020. 

Suntec first announced its support package by giving eligible tenants rental rebates for the month of March. In its second tranche of rental assistance, which is partially funded by property tax rebates announced by the Government,  it comprises a 0.5 month rental rebate for the months of April, May, and June. With the second tranche announced, retail tenants will receive up to 2.75 months of rental rebate, which includes one month Security Deposit and rental rebate given out in March. 

To show further support, Suntec City had waived rents of all tenants during the Circuit Breaker period. Suntec City also passed on the remaining savings from property tax rebates in the form of rental rebates for the month of May. This will amount to approximately another month of rental reduction for most tenants in May 2020. Together with the one-month cash security deposit that mall tenants can use to offset rent, almost all tenants will enjoy cash flow relief equivalent to a total of three months’ rent over this trying period.

For more information on what the Government proposed to help the retail tenants, please head over to this article.

What’s next for Suntec and MCT?

The main focus for Suntec and MCT in this section will be the office and business park segments. 

As many employees start to work from home, many companies will come to realise that working from home isn’t as bad as one would have thought if a pandemic did not occur. This will therefore put pressure into the office industry in general. 

Even after the pandemic, many companies could allow employees to work from home for an extended period or make it a permanent arrangement, thus reducing the demand for office spaces. On the brighter side, some analyst suggests that the shift to working from home takes time and will not see a significant drop in occupancy in the near term, particularly at prime, central location.

This trend can be shown on the recent data by URA where prices of office space in the central region contracted 4.3% in the latest quarter, after easing 4% in the previous quarter. Islandwide vacancy rate of office space rose to 12.1% from 11% as the amount of occupied office space decreased by 55,000 sqm of NLA while the stock of office space expanded by 43,000 sqm of NLA in the same quarter. 

According to CBRE, looking forward, vacancy levels are likely to rise as there’s relocations of major occupiers. Furthermore, with the dull demand for offices space, further downward pressure on rents is expected in the second half of 2020. 

The business park market which MCT has exposure in continued to display resilience. The value proposition of business parks remains, with efficient floor plates and competitive rents compared to offices. Rents for City Fringe maintained at $5.85 psf/ month, an increase of 1% year on year. 

CBRE expects business parks rents to show some form of resilience as the tight supply is expected to lend support to rents in the City Fringe submarket. This is due to the appeal of the business park sector as a lower cost alternative and the resilience of its pool of qualifying tenants.

Closing Thoughts

I believe that the market is fair, there’s always a reason why MCT is trading at a premium all the time while Suntec started to trade at a discount about 3 years ago or so.

Suntec 13MCT6 

We shall look at the distribution of Suntec after 2010 as it had issued private placement shares for an acquisition. DPU did not grow after the private placement and it took a hit in recent years where in the latest financial year, it reported DPU of 9.507cents, one of the lowest in 10 years. Suntec blamed it on an enlarged unit base and reduction in capital distribution. On the other hand, MCT has been growing its DPU since it was listed in 2011. 

However, one has to take note that two of Suntec’s properties – Olderfleet and 9 Penang Road have yet to contribute any income. Olderfleet would have achieved practical completion by the time of posting and income contribution to the REIT will start on 1 August 2020. For 9 Penang Road, it is fully leased to UBS and target occupation is expected in the second half of 2020. No information is disclosed on when the property will start contributing income. 

Therefore, I feel that investors should wait and see how much income can be contributed from these two properties and whether with these new contributions will Suntec grow its DPU beyond 10 cents. 

I just want to emphasise that one should really be concerned about the financial health of Suntec, especially its gearing ratio and interest coverage ratio. Unitholders should be worried of Suntec rising leverage ratio close to 50% with EBIT falling due to lesser revenue collected during the pandemic, this means that there’s a higher chance of issuing rights to bring down its leverage. 

At the end of the day, one should really consider MCT over Suntec for the following few reasons. There’s always a reason why one can trade at a premium and the other doesn’t.

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3 Comments Add yours

  1. Vince says:

    Quite detailed comparison, MCT is indeed solid as per your comparison. I have shared your post in Facebook group – REIT Investing Community, a group where people can share and discuss about REIT topics. Hope you could join and post there directly in the future.

    Like

    1. May I ask where is the link to the group? Thank you!

      Like

    2. Found it, requested to join!

      Like

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