Suntec REIT

[Stockinvestor]

Came across this question in another forum. Also agree the fees, especially asset management fees way too high. Checked thru and couldn't find any good reason for it. Hope some friends here can help to explain.

financial quater from 1/7/2008 to 30/9/2008.

Gross revenues: S$61,447,000.00
Property management fee: S$1,739,000.00
Asset management fees :S$7,327,000.00
Trust expenses: S$844,000.00

Why there are Asset management fees when there is already a property fee charged on the trust ? and why is it so high ? almost 12 % ????

[ucypmas]

Usually there is fee of 0.5% on total property value by the management company. Which is why management always want to revalue when the market is heading upwards to squeeze more fees out of the property. Using a back of the envelope calculation, for Suntec's case the total asset value is about 5bil, so 0.5% of that translates to about 25mil a year, about 6-7mil per quarter.

There is also a fee of 2-3% (depending on REITs) which is based on the revenues collected. This provides management with the incentive to squeeze more rent out of tenants. In this case the property management fee is 1.74 mil which is about 2.8% if revenues - sounds about right.

Other fees include commission to the management company of 1% of purchase value for new property/assets added to the REIT (something like an agent's charge). How this ensures good value for the property purchased for unitholders I don't know. There is also 1 month commission for every rental renewal (depends on REIT). REITs also issue units as payment for the services of the management firm, presumably to incentivise performance and to increase distributable income to unitholders. However I see it as a dilution and at current yield levels, extremely so. Its like the company paying you a salary, and a continual interest of 16% on that salary, year-in, year-out.

Most REITs are structured to make money for the property developer (i.e. milk it for continual income). The fees allow them to take a chunk of the earnings upfront before redistribution (of which they also own units to claim a share of the income). Unitholders are only incidental beneficiaries.

However the market's recent decline has resulted in there is sufficient premiums in the returns for us to take some risk in buying them. I would like to know if any of the regulars in this forum think REIT is a good long-term holding now.

[winston]

However the market's recent decline has resulted in there is sufficient premiums in the returns for us to take some risk in buying them. I would like to know if any of the regulars in this forum think REIT is a good long-term holding now.

Hi ucypmas,

As you know, there's a lot of headwinds for the REITS including falling rents, devaluation of their assets, financing and refinancing issues..

Having said that, the yields are better than fixed deposits and they are trading at steep discounts to their RNAV.

The question now is, whether you would be able to buy them cheaper, in a few months time. Market Direction and the Economic Direction is on a one way street south... with some bear market rallies in between..

Take care,
Winston

[millionairemind]

Published January 24, 2009

Suntec Reit distribution income surges
Jump of 31.7% to $44.1m for the Oct-Dec period; DPU for quarter also up at 2.858 cents

By TANG WEN EN

SUNTEC Real Estate Investment Trust (Suntec Reit) has reported a distribution income of $44.1 million for the quarter ended Dec 31, 2008, a jump of 31.7 per cent.

The distribution per unit (DPU) for the quarter came to 2.858 cents, up 25.4 per cent year-on-year. This works out to an annualised DPU of 11.339 cents, representing a yield of 17.4 per cent based on Suntec Reit's closing unit price of 65 cents on Jan 21.

Suntec Reit has changed its financial year-end from Sept 30 to Dec 31, and for the 15 months ended Dec 31, achieved a DPU of 13.303 cents.

For the October-December 2008 quarter, gross revenue rose 16.8 per cent to $63.5 million and net property income jumped 28.1 per cent to $47.9 million.

Regarding Suntec Reit's dividend payout ratio, CEO of ARA Suntec, Yeo See Kiat, said: 'We're giving 100 per cent. We've been giving 100 per cent since day one.' ARA Suntec is the manager of Suntec Reit.

When asked about the request by some Reits to the government for a reduction in the minimum payout ratio to Reit unit-holders to as low as 50 per cent and yet still enjoy tax concessions, Mr Yeo said temporarily lowering the cap would give Reits a bit of flexibility in these tough times. However, Suntec Reit is not considering such a temporary measure, Mr Yeo noted, adding that if Suntec Reit had wanted to, it could have lowered its payout ratio to the currently-permissible cap of 90 per cent.

When asked whether Suntec Reit intends to pass the Budget's tax rebates to retailers seeking to benefit from the government measure, Mr Yeo said that he might be willing to talk to the retailers on an individual basis but Suntec Reit had to go through the Budget concessions in detail before it could give a clear answer.

Asked about refinancing, Mr Yeo said: 'We have worked very hard to maintain our credit rating.' Suntec Reit's average all-in financing cost for the quarter was 3.26 per cent and its gearing stood at 34.3 per cent as at Dec 31, 2008.

'Whilst our next major refinancing is only due in December 2009, we are currently working on the refinancing ahead of its maturity,' Mr Yeo added.

[winston]

From DMG:-

Suntec REIT: Sundown (NEUTRAL\S$0.66\TP:S$0.75)
Brandon Lee (62323897, [email protected])

Ending the year decently. For its latest period (1 Oct 08 – 31 Dec 08), Suntec REIT (SUN) registered a 25.4% YoY (+0.1% QoQ) improvement in DPU to 2.86¢, matching expectations. Helped by improved rentals from both retail and office, topline was up 16.8% YoY (+3.3% QoQ) to S$63.5m, which cascaded down to a 28.1% YoY jump (+5.1% QoQ) in NPI to S$47.9m. As SUN will be switching its financial year to end-Dec (end-Sep previously), DPU for its 15-month period came to 13.30¢. The decent results were marred by a 7.7% QoQ fall in asset value (Suntec City: -7.0%, Park Mall: -0.6% and Chijmes: -5.8%), resulting in an 11.0% drop in NAV to S$2.01 per share. We estimate utilised cap rates have crawled up 10 – 20 bps from three
months ago, with office at 4.6 – 5.0% and retail at 5.35 – 5.50%.

Refinancing clouds gather. Primary focus for SUN’s management remains the rollover of its S$700m CMBS due in Dec 09, and at present, it is heavily and pro-actively engaged with several banks. While we do not doubt its established banking relationships, quality assets and reputable sponsor, we reckon two key issues will plague SUN’s refinancing route. Firstly, we foresee office and retail cap values to further head south from current levels, as rents and occupancies taper off with the weakening macroeconomic environment. Implying a rise in LTV ratios, banks could turn more cautious towards extending credit.

Additionally, while we are encouraged by three REITs’ (Cambridge, CCT and A-REIT) recent successful capital raising exercises, this also suggests that the already-limited pool of ready credit has decreased. With several REITs yet to refinance their major chunks (CMT, CDLHT and FCOT) and the credit markets still not exhibiting
distinct signs of ameliorating, we believe the fight for credit would toughen further.

Rent assumptions tweaked. Management is closely monitoring the trading performance of tenants, and notes traffic for its malls has generally been stable over the past three years. Nonetheless, we surmise traffic and retail spending would gradually taper off following Chinese New Year. As such, tenants’ bargaining power could increase, sparking off either a fall in retail rentals or restructuring of existing lease structures. For SUN’s retail assets, we are assuming flat rental reversion rates (previously -1 to +2%) for FY09 – 11. For its Suntec City office, rents have begun to soften, as leases were secured at an average rent of S$11.20 psf pm for 5Q08, vs. S$12.57 in 4Q08. We are keeping our previous assumptions for its office assets: negative rental
reversions of 5% for FY09, 10% for FY10 and 5% for FY11. Meanwhile, portfolio-wide occupancy levels remain at 90 - 95%. Note that our rental assumptions could change slightly once there is further clarity on management’s decision on the 40% tax rebates on commercial properties included in Budget 09.

Downgrade to NEUTRAL at lower fair value – S$0.75. Our revised estimates, after imputing the sight changes above, reflect a 1.8 – 2.6% fall in DPU for FY09F and FY10F to 8.61¢ (previously 8.77¢) and 8.36¢ (previously 8.58¢) respectively, equating to FY09F and FY10F yields of ~ 13%. As such, our DDM-predicated fair value (premised on: rf = 3.5%,
= 0.9, equity risk premium = 7.6% and cost of equity = 10.3%) for SUN now inches slightly lower to S$0.75 (previously S$0.79). With share price upside capped by refinancing risks and economic weakness, we are downgrading SUN to a NEUTRAL rating (previously BUY). Catalysts include
refinancing overhang removed, while risks are more economic dampeners.

[winston]

From OCBC:-

Suntec REIT: Results flat on QoQ basis
Results flat QoQ. Suntec REIT (Suntec) posted a 16.8% YoY and 3.3% QoQ gain in gross revenue to S$63.5m for the quarter ended 31 December.

Suntec will pay out 2.858 S cents per unit for the quarter, up 25.4% YoY but flat QoQ, translating to an annualized yield of roughly 17%. We note that Suntec had enjoyed a marginal uptick during the property revaluation completed in the previous quarter. Just three months later, Suntec booked a revaluation deficit of S$328.7m driven by the valuers' more conservative projection of rental rates.

Achieved office rentals slip, as expected. Office revenue contributed 45% to total gross revenue (ex One Raffles Quay revenue). For the quarter, Suntec City office replacement and renewal leases were secured at an average of S$11.20 psf per month - 11% lower compared to the S$12.57 psf pm achieved in the previous quarter but higher than preceding rents. The REIT will see about 65% of its office portfolio ex ORQ up for renewal in the next two years. We expect achieved rentals to continue softening down to high single digits this year. But the average passing rent at Suntec City Office of around S$6.50 psf pm (our estimate) gives an adequate margin of safety.

Uncertain retail landscape. Retail revenue contributed 55% to total gross revenue (ex ORQ). We expect that like its peers, Suntec will pass on the bulk of the savings from the recently announced property tax rebate to its tenants. Suntec's manager said the "real test" for retailers will be the post-Christmas and Chinese New Year shopping landscape. The manager said that there isn't a long queue, so far, looking for renegotiations but it was willing to work out something mutually satisfactory with its tenants. It said the main priority was to maintain occupancy levels. We understand that a typical response would be to restructure the lease (a lower rental today but a longer lease term, etc). We have priced in a 8-10% per annum decline in
Suntec City Mall rentals over the next two years.

Refinancing key overhang. Suntec has about S$825m of debt, or about 44% of its total borrowings, up for refinancing in the next 12 months. The manager said Suntec is in the midst of engaging with several financial institutions. This is a lengthy process but the sooner Suntec can clear this overhang, which is weighing down valuations, the better. The REIT is currently leveraged at 0.34x debt-to-assets. Maintain BUY with S$0.90 fair value on valuation grounds. (Meenal Kumar)

[millionairemind]

Suntec Reit
Jan 28 close: $0.67
Citi, Jan 23

RESULTS in line: For Q408, Suntec reported a distribution per unit (DPU) of 2.85 cents, flat quarter-on-quarter. Rental revenue was up 3 per cent q-o-q and net property income (NPI) improved 5 per cent q-o-q as reversion rates remain higher than preceding rental rates. Overall occupancy rate weakened slightly to 98.7 per cent from 99.3 per cent a quarter ago. Office leases were signed at an average rental of $11.20 psf per month compared to $12.57 psf per month a quarter ago.

Debt capital details: Suntec's current gearing stands at 34.3 per cent, a slight increase from 31 per cent previously, due to falling asset value. Existing all-in financing cost is 3.26 per cent, interest cover at 3.8x. Management remains confident in its ability to refinance in loans. We have raised its refinancing cost to 5 per cent.

Write-down in asset values: Excluding One Raffles Quay (ORQ), Suntec wrote down approximately $328.7 million in asset value in December 2008, a 7 per cent decline from September 2008. The decline was largely attributed to Suntec City (including the mall). ORQ, of which Suntec has a 1/3 stake, was written down from $1.2 billion to $1.1 billion, a decline of about 13 per cent q-o-q.

Cut DPU and target price (TP) to $0.97, maintain 'buy': We have cut our DPU by 3-6 per cent and TP by 4 per cent to $0.97 (from $1.01) to reflect the worsening economic situation. We are expecting prime grade A office rental to plunge over 60 per cent in the next 2 years to $6 psf from the current $14.95 psf. We have also assumed that ORQ will see a significant fall in contribution in 2012 when income support expires in March 2012. We are, however, maintaining our 'buy' on Suntec for valuation reasons.
BUY

[ichew]

just saw stockinvestor, ucypmas and winston nov-08 postings
a bit late but still i tot i wanna contribute my 0.02 cents

i agree with ucypmas that "Unitholders are only incidental beneficiaries.".
and with winston too that "yields are better than fixed deposits and they are trading at steep discounts to their RNAV."

i tot REITs r suppose to be bgt for yields, and their growth (if any) would be a bonus. It's just tat past 4 yrs had been wonderful for the sponsors to offload n recycle cash. It doesnt help too tat mgrs r paid more if they own more ppty. The incentive to "grow" and "expand" is just too much.

but with the sell-dwn, many REITs r now trading at yields tat r too good to ignore (at least to me)

my strategy (which may be wrong) is to set aside a portion of my investible $$ to slowly buy into some REITs with reasonable debt, no immediate refinancing headaches, strong sponsors, holding good or blue-chip assets, trading at >50% discount to their NAVs, and preferably their rentals r defensive or locked in the nxt 3yrs

slowly buying means i will be averaging dwn
and once my sum of investible $$ is used, i will just hold n collect div
(just want to highlight this means i will stagger my buying and do in-depth study 1st)
and since there r no immediate refinancing, i assume i will not need to fork out extra $$ for rights or pref sh issues
also i assume tat with such tight credit, the mgr will not be asking me for extra money to buy new properties from their sponsors
and i doubt sponsors will wanna off-load now in a bear property mkt

i sincerely hope that with this basket of REITs, i can collect enough dividends to break-even in 7-10yrs and then subsequently dividends would be free

lastly, just want to add that i am also salivating over the asset mgt fees n ppty mgt fees.
so i am vested (a little too) in the listed coy tat is earning these fees too

[winston]

...buy into some REITs with reasonable debt, no immediate refinancing headaches, strong sponsors, holding good or blue-chip assets, trading at >50% discount to their NAVs, and preferably their rentals r defensive or locked in the nxt 3yrs

Dear ichew,

So which counter have you discover so far ?

Take care,
Winston

[ichew]

hi winston

i tot kreit MAY be one tat fits the bill
i understd tat office rentals r affected and MBFC etc r adding much space
but kreit's current avg rental is $7.61 psf pm which is much lower than the reported high of $13-15 psf pm
of cos i will run if ubs, or other banks in ORQ close shop

but i wasnt too happy tat it ex-div more than their declared 5 cents dividend
i mean look at cct
such good support ex-div
also 5cents declared but drop 4cents only

so the lesson i learn here is again liquidity
still i'm holding on to my lots n looking fwd to their nxt div
prayin n hopin tat their full yr div will come up to 10cents
assumin i dont avg dwn, i breakeven in abt 7yrs

my own very crude estimate:
their total NLA = 1,231,692 sq ft
avg $7.61 psf pm
assumin worse case drop to $3.50 psf pm
=> gross rentals per yr of $51m
minus estmated ppty expenses of $13m
minus borrowing costs of 23.58m
minus mgr fees of $13m
plus net tax adjustments of 37.7m
gives 39m or abt 6cents div per sh

kreit has their own Gross Rent sensitivity forecast
can be found in several of their docs
range from plus minus 0.03cents to 0.06cents to their base case

in appendix A2-10 (pg 81 of 118) of the Rights Issue circular dtd 9 APRIL 2008,
they used 0.03cents
let's assume 5% changes in Gross rental will impact DPU by 0.04cents la
so $7.61 to $3.50 => a drop of abt 55%
so DPU will drop by 0.44cents
if DPU is 8cents, then DPU becomes 7.56cents
hmmm frankly it doesnt make sense so i must have got it wrong somewhere
i mean cannot be rentals drop 55% but DPU drop only 0.44cents only right?
anyone who knows pls let me know
issit becos of "Changes in the Gross Rent of uncommitted leases"?

btw pls note that i'm still very much learning abt investing
so take my words with a pinch of salt
i am merely sharing and hoping that more experienced forummers can help guide me