On behalf of the Board of ARA Trust Management (Suntec) Limited (“Board”), it is my pleasure to present to you the annual report of Suntec REIT for the financial year ended 31 December 2020 (“FY 2020”).
2020 was unprecedented, with the novel coronavirus (“COVID-19”) pandemic causing unforeseen disruptions to our daily lives and businesses. Throughout this challenging year, we worked closely with all our stakeholders to mitigate the impact caused by the pandemic. While our convention and retail businesses were most affected, this was mitigated by the resilient performance of our office portfolio in Singapore and Australia, as well as the income contribution from the newly acquired 21 Harris Street in Sydney and Olderfleet, 477 Collins Street in Melbourne, which received practical completion in end July 2020.
In December 2020, Suntec REIT made its maiden foray into the United Kingdom, with the acquisition of a 50.0% interest in two Grade A office buildings with ancillary retail (“Nova Properties”) located in the heart of Victoria, West End, London. This will further enhance the resilience, diversification and quality of our existing portfolio of high quality commercial assets.
Distributable income from operations in FY 2020 was S$209.2 million, S$27.5 million or 11.6% lower yearon- year. The rent assistance granted to retail tenants at Suntec City Mall, Marina Bay Link Mall and Southgate Complex and the absence of income contribution from Suntec Convention and as well as the absence of compensation from the Marina Bay Financial Centre Properties contributed to the decrease in distributable income from operations. This was mitigated by the better performance and contributions from the Australia office portfolio, stronger performance of One Raffles Quay as well as lower financing costs.
10.0% of the distributable income from operations amounting to S$10.3 million was retained in the first half of 2020, as we sought to achieve a balance between providing a reasonable return to unitholders, building a cash reserve and supporting our tenants. With signs of recovery in the retail business and the continued resilience of our office portfolio in Singapore and Australia, the S$10.3 million was fully distributed to unitholders in February 2021 together with the fourth quarter distribution.
Distribution per unit (“DPU”) of 7.402 cents for FY 2020 was 22.1% lower year-on-year due to the lower income from operations and the absence of capital distribution.
The underlying resilience of the Singapore office portfolio coupled with our proactive asset management resulted in a committed occupancy of 96.6% as at 31 December 2020, well above the market occupancy of 93.2% for Grade A, CBD offices. In addition, Suntec City Office achieved 11 consecutive quarters of positive rent reversions.
To further strengthen the value proposition of Suntec City Office, asset enhancement works are currently underway to upgrade the lifts, lobbies and restrooms of the five office towers. Upgrading works for Tower Five were completed in 2019 and were well-received by office tenants while works for Towers One and Four will be completed by the first quarter of 2021. For the remaining two office towers, upgrading works are expected to be completed by early 2022.
Our office towers in One Raffles Quay and Marina Bay Financial Centre performed well, with positive rent reversions for the leases secured in 2020. Committed occupancies of 97.3% as at 31 December 2020 for One Raffles Quay and 98.2% for Marina Bay Financial Centre, were both above the market benchmark of 96.3% for Grade A offices in the Marina Bay micro-market.
The committed occupancy at 9 Penang Road was 98.5% with the office towers fully leased to UBS, which started moving into their new premises in November 2020. The retail units are currently being leased out.
Occupancies for our Australian properties remain high with 177 Pacific Highway and Southgate Complex Office achieving 100% occupancy as at 31 December 2020. While the occupancies for Olderfleet, 477 Collins Street, 55 Currie Street and 21 Harris Street were 97.2%, 91.7% and 68.7% respectively, the vacancies at these properties are protected by rent guarantees provided by the respective vendors.
Singapore’s retail industry was significantly impacted during the Circuit Breaker period and subsequently, by mandatory safe management measures (“SMM”). More than four months of rental assistance, comprising close to two months worth of property tax rebates and government funding, was granted to the majority of our tenants to support them through this challenging period. Tenants were also allowed to draw down one month of their cash security deposit to ease cashflow difficulties.
Physical and digital marketing support was extended to tenants to assist them in their recovery. The launch of Suntec+ Eats and the provision of additional seating areas also helped our F&B tenants boost their sales amidst capacity restrictions imposed by SMM. Following the re-opening of the Singapore economy, we are seeing green shoots of recovery in our retail business. By the end of FY 2020, tenant sales had recovered to more than 85% of pre-COVID levels, with some trade categories recovering faster than others.
The convention business was the most severely impacted by the pandemic due to border closures, travel restrictions and the prohibition of large-scale events. To support its business needs, S$40 million was injected into Suntec Singapore in July 2020, increasing Suntec REIT’s equity interest from 60.8% to 66.3%.
In December 2020, Suntec REIT completed the acquisition of its 50.0% interest in Nova Properties. This asset will enhance the resilience, diversification and quality of Suntec REIT’s portfolio with income contribution from high quality office tenants and its long weighted average lease expiry (“WALE”) of 10.6 years. There is also a 2-year guarantee on the retail income, which contributes approximately 10.4% to the total income of the property. This will provide rental protection to ride out the current pandemic. The net property income yield of 4.6% will provide a DPU accretion of 2.3% to unitholders.
As at end 2020, Suntec REIT’s assets under management had grown 12.5% year-on-year to S$11.7 billion driven mainly by the completed development of Olderfleet, 477 Collins Street in Melbourne, as well as the newly acquired properties at 21 Harris Street in Sydney and Nova Properties in London. Suntec REIT continues to be Singapore-centric with 76% of its assets under management in Singapore with the remaining 17% and 7% are in Australia and the United Kingdom respectively.
Suntec REIT’s balance sheet remains healthy with an aggregate leverage ratio of 44.3%, within the regulatory limit of 50.0%. As at 31 December 2020, the average financing cost for FY 2020 was 2.53% per annum with approximately 61.0% of the debt fixed or hedged, and with a weighted average debt maturity of 3.0 years.
In 2020, Suntec REIT raised S$2.1 billion in debt financing and further diversified its sources of funding with its first perpetual securities issuance of S$200.0 million. There are also undrawn facilities of S$750.0 million in place to refinance debts due in 2021.
We are pleased to have achieved the highest GRESB 5 Star rating in our inaugural submission. As one of the leading Environmental, Social and Governance benchmarks for real estate and infrastructure investments globally, the 5 Star rating is testament to Suntec REIT’s commitment towards sustainability practices, making a positive impact on the community and the environment as well as our investment in people.
Sustainability continues to be an important aspect of Suntec REIT’s long-term business strategy.
More information can be found in our sustainability report which will be released separately in May 2021.
Looking ahead, revenue from the Singapore office portfolio is expected to remain stable in 2021 underpinned by the strong rent reversions achieved in the past quarters. In response to evolving office demand for hybrid work arrangements, leasing strategies will provide for greater flexibility in the lease tenures, rent structures and lease terms. Rent reversion for the Singapore office portfolio is expected to be positive in 2021 with occupancy remaining healthy in the mid 90% range.
The Singapore retail market will be supported largely by domestic consumption in 2021. We expect the increase in numbers returning to offices and the rollout of Singapore’s vaccination programme to drive the continued recovery of footfall in Suntec City mall. Overall mall occupancy is expected to recover to more than 95% by end 2021 as market sentiment improves.
Recovery of the Meetings, Incentives, Conventions and Exhibitions (“MICE”) industry will be slow due to weak international travel and SMM for large-scale events. To support the recovery of the convention business, we are exploring ways to diversify and develop new revenue streams while working closely with authorities on ways to ease SMM without compromising health and safety priorities. Part of these efforts include investing in the necessary SMM infrastructure to better position Singapore and Suntec Convention as the MICE destination of choice post-COVID. A comprehensive business review is also underway to identify opportunities to pivot Suntec Convention’s core business.
Our Australian office portfolio will remain resilient, underpinned by strong occupancy, annual rent escalations and long lease tenures with minimal lease expiries in 2021.
In the United Kingdom, although concerns over a hard Brexit have been allayed, economic conditions remain challenging. However, revenue from Nova Properties will be supported by full occupancy and a long WALE with no lease expiry until 2027.
With the further resumption of economic activities expected in 2021, we are focusing on positioning Suntec REIT for recovery through continued proactive lease management to enhance the resilience of our properties; undertaking active capital management to strengthen Suntec REIT’s balance sheet and sourcing for good quality assets that are accretive in order to deliver sustainable returns and long term value to unitholders.
I would like to thank my fellow board members for their continued counsel and the management team for their hard work and dedication despite the challenges wrought by the pandemic. May I also extend my heartfelt appreciation to our unitholders, tenants, business partners and stakeholders for their continued trust and steadfast support.
CHEW GEK KHIM
Chairman and Non-Executive Director
27 March 2020