Separately, the Trust’s Manager expects the performance of the office portfolio to remain positive in coming quarters.
The Trust just announced earnings for Q1 FY14:
Gross revenue: +32.8 per cent to S$66 million
Net property income: +42.7 per cent to S$43.8 million
Distributable income: +16.1 per cent to S$37 million
Cash flow from operations: S$40.9 million vs S$33 million
DPU: 2.229 cents per unit vs 2.228 cents per unit
Revenue was higher thanks to the opening of Suntec Singapore Convention & Exhibition Centre after renovations in June last year.
Net income was higher due to maiden coupon income on progress payments made in relation to 177 Pacific Highway project in North Sydney, Australia.
Bullish analyst reports
Analyst Kevin Tan at OCBC Research finds the results to be “within expectations” as the DPU makes up about 24per cent of the broker’s full-year estimate.
The broker is also impressed by the lease management at the Trust.
It points out that leases for over 100,000 sq ft office space, which were due to expire later this year, were renewed within the first quarter.
On the renovations, OCBC believes the construction costs are within budget and the lease space under renovation in phase two at Suntec City is expected to “open shortly”.
Also, the phase three renovation is expected to complete in Q4.
Suntec REIT has also signed an S$800 million (RM2.08 billion) five-year unsecured loan facility to refinance its debt due in 2014-15.
Together with this loan facility and an S$350 million private placement in Q1, the Trust wouldn’t need to refinance debt until 2016.
As a result, OCBC feels its gearing will drop to 33.9 per cent from 37.3 per cent at present.
Also, its debt maturity tenure will extend to 4.2 years from 2.44 years a quarter ago.
For all the above reasons, OCBC maintains a BUY rating on the Trust with an unchanged target price of S$1.85.
Analyst Ong Kian Lin at Maybank Kim Eng also finds Q1 earnings to be in line with expectations.
On phase two renovations at Suntec City, the broker says it will open in two stages before June 30 (in what seems to be a typo the report says June 31).
Suntec REIT had originally targeted to complete phase two renovations in Q1 (refer slide 25 of its Q4 FY13 earnings presentation).
But according to Maybank Kim Eng’s research report, the delay was caused by “more stringent safety checks by the Building and Construction Authority”.
The broker has increased its DPU estimates for FY14-16 by 1.9 -3.4 per cent due to revised rental assumptions and interest cost savings.
Therefore Maybank Kim Eng maintains a HOLD rating on the Trust but with a higher target price of S$1.70 from S$1.63 previously.
Bearish analyst report
Analysts Rachael Tan and Derek Tan at DBS Group Research find Q1 earnings to be in line with expectations.
The broker claims the phase two renovation of Suntec City were “understood to be delayed to 2H14 due to engineering issues”.
However, the phase 3 renovation remains on track for completion in Q4 this year and re-opening the space in Q1 next year.
The broker has reduced its DPU estimates for FY14 and FY15 by two – three per cent due to the delay in the phase two renovation and the increase in the shareholder base after the recently completed private placement.
Therefore, DBS Group Research has downgraded the Trust to HOLD from BUY earlier with a lower target price of S$1.66 compared to S$1.78 previously.
Investor Central. We keep your investments honest.
1. What is the real reason for a delay in completion of phase two renovation at Suntec City?
Maybank Kim Eng’s report says the delay was caused by “more stringent safety checks by the Building and Construction Authority”, whereas DBS Group Research claims the phase two renovation was “understood to be delayed to 2H14 due to engineering issues”.
Suntec REIT had targeted to complete phase two renovation at Suntec City in Q1.
But now it has been delayed to Q2 (according to Maybank Kim Eng) or to the second half of the year (according to DBS Group Research).
Therefore any reasonable investor would wonder which of the claims is correct and why the Trust couldn’t complete phase two renovation on time.
Also, what impact would the delay have on the cost of renovation and the Trust’s profitability?
2. What happened to 20,000 sq ft retail net lettable area in Suntec City?
On slide 24 of its FY2013 earnings presentation, the Trust said the retail net lettable area of Suntec City will increase from 855,000 sqft to 980,000 sqft.
But on slide 20 of its Q1 FY2014 earnings presentation, the Trust said the retail net lettable area will increase to 960,000 sqft only.
That’s 20,000 sqft less than what it said in its presentation in the previous quarter.
We wonder what caused the scaling back of the additional retail space.
3. Why is it so quiet in Suntec City these days?
Admittedly, we don’t spend much time in Suntec City.
But it seems not many other people are either.
Our unscientific, passing-by view of the reopened shopping mall is that it’s very quiet.
We’re certain Suntec REIT has done more research on this than we have.
So, what do the footfall numbers show?
4. Why is it over-paying performance fee to the Manager?
ARA Trust Management (Suntec) Limited is the Manager of Suntec REIT.
According to page 3 of its Q1 earnings report, Suntec REIT paid an S$3.25 million performance fee to the Manager.
That’s 12 per cent more than what it paid in Q1 last year.
As a percentage of net property income, the performance fee works out to be 7.43 per cent in Q1 this year and 9.45 per cent in Q1 last year.
But both are higher than the performance fee it is permitted pay to the Manager.
According to page 75 of Suntec REIT’s 2013 annual report, the Manager is entitled to “an annual performance fee equal to a rate of 4.5 per cent per annum of the Net Property Income (as defined in the Trust Deed) of the Trust and any Special Purpose Vehicles (as defined in the Trust Deed) for each financial year, or such lower percentage as may be determined by the Manager in its absolute discretion or such higher percentage as may be approved by an Extraordinary Resolution at a meeting of Unitholders”.
The Trust disclosed the same criteria in its prospectus (page 16) at the time of listing in 2004.
For FY2013, the Trust paid a performance fee of S$12.02 million to the Manager.
That was 8.9 per cent less than the S$13.2 million performance fee it paid during 2012 (refer page 3 of FY2013 earnings report).
Suntec REIT’s FY2013 performance fee works out to be 8.1 per cent of the net property income.
It seems the Trust paid a performance fee that’s almost twice the ‘4.5 per cent of net property income’ criteria highlighted in the prospectus and the annual report.
In FY2012, the Trust paid a performance fee of S$13.2 million which also works out to be 8.1 per cent of the net property income.
Therefore, in the previous year too, the Manager was paid a performance fee that was in excess of the benchmark cited in the 2012 annual report.
In the meantime, we can’t find any notice which says the unitholders of Suntec REIT approved a hike in the performance fee, or any other explanation for the fee.
In the absence of any such approval from its unitholders, we wonder on what basis the Trust has been over-paying the performance fee to its Manager.
5. Is it in compliance with the Code of Corporate Governance 2012?
On page 50 of its FY2013 annual report, Suntec REIT claimed to have adopted the Code of Corporate Governance 2012 (Code) with effect from its FY2013 annual report.
But according to the Code of Corporate Governance 2012 (page 4), the independent directors should make up at least half of the board where the Chairman is not an independent director.
As seen on page 122 of its FY2013 annual report, Suntec REIT’s Manager’s board of directors was chaired by Dr Justin Chiu Kwok Hung, who was a non-independent director.
Yet, the nine-member board had only three independent directors.
In other words, the independent directors didn’t make up at least half of the board.
Therefore, contrary to its claim, the Trust’s Manager seems to be non-compliant with the Code, even after subsequent changes to the board.
On April 17, the Trust announced the resignation of its Chairman Dr Justin Chiu Kwok Hung and non-executive director Mr Edmond Ip Tak Chuen.
As a result, its board strength reduced to 7 directors.
Also, Ms Chew Gek Khim - a non-executive director - took charge as the Chairman of the board.
So, Suntec REIT’s Manager’s board again has a non-independent Chairman.
And the three independent directors do not make up at least half of the seven-member board.
Apparently, the board still doesn’t comply with the guidelines of the Code.
Therefore that makes us wonder why the Trust claims to be in compliance with the Code of Corporate Governance 2012 when it doesn’t appears to be the case.
Or, are we missing something here?
6. Was its former Chairman struggling to devote time to the Trust?
Dr Justin Chiu Kwok Hung resigned from Suntec REIT’s Manager’s board on April 17.
And the reason was: “due to other works” [sic].
Remarkably, the annexed list of his present directorships runs into a staggering six pages, with each page naming about 70 companies.
In other words, he continues be a director of about 400 other companies.
Therefore that makes us wonder if that’s why he stepped down from the Suntec REIT’s Manager’s board.
How does he make time for all these directorships?
7. How did Mr Edmond Ip Tak Chuen manage directorships at more than a thousand companies?
Mr Edmond Ip Tak Chuen also resigned on April 17.
Just like Dr Justin, he resigned “due to other works” [sic].
But the most surprising part was the annexed list detailing his other current directorships.
The list is 16-pages long, with each page containing names of about 80 companies.
That means he is a director of more than 1,200 companies.
It’s simply amazing that a person can be a director of so many companies at the same time.
Any reasonable investor would wonder how he did that.
We have sent these questions to Suntec REIT’s CEO Mr Yeo See Kiat ([email protected]) and Ms Melissa Chow ([email protected]) to invite them for an on-camera interview, and/or seek their written response.
We were notified we would be receiving answers by Monday (May 5).
However, yesterday we were notified executives were traveling until next week.
If/when we receive responses we will be updating this article.―Investor Central
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