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Will Suntec Real Estate Investment Trust Be Of Interest To This Investing Legend?

Listed since 2004, Suntec REIT (SGX: T82U) is the first  real estate investment trust listed in Singapore that owns properties that are used for both retail and/or office purposes.

The REIT is currently managed by ARA Asset Management (SGX: D1R) – a real estate fund management company – and has a market capitalisation of S$4.3 billion. Its portfolio includes: 1) The office and retail properties of Suntec City; 2) Park Mall; 3) 60.8% of Suntec Convention & Exhibition Centre; 4) one-third of One Raffles Quay; 5) one-third of Marina Bay Financial Centre Tower 1 & 2 and Marina Bay Link Mall; 6) a commercial building at 177 Pacific Highway, Sydney, Australia that’s under construction.

With some really strong assets in its portfolio, will it be a company that the legendary investor, John Neff, would be interested in?

Neff’s Style

The main tenets of Neff’s investment style could be summarised as such: A preference for companies that carried low price/earnings ratios; companies with strong business fundamentals; and companies that are able to grow by at least 7% per year. Using Neff’s framework, let’s see if Suntec REIT would hold up.

Suntec REIT has a portfolio of high quality assets and has a strong balance sheet with a debt to asset ratio of 37.3%; in light of the above, it could be seen as a trust with solid fundamentals. Looking at the growth rate of Suntec REIT, we can see that it only had an income available for distribution of S$95 million in its 2006 financial year (the 12 months ended Sep 2006). Since then, the REIT has has grown its distributable income to S$211.2 million in 2013, representing a compounded annual growth rate of more than 12%. That’s higher than Neff’s expectation of 7% in annual growth.

Now, although Suntec REIT is currently trading at 10.7 times its earnings for the last 12 months (i.e. it’s carrying a price/earnings ratio of 10.7), a fair chunk of the profits came from fair value gains on its investment properties, which can be classified as non-recurring income. If we readjust the REIT’s earnings to only focus on its operating income, Suntec REIT will then be trading at a PE of around 19 and that’s hardly considered a “low” P/E ratio.

Foolish Summary

As Suntec REIT is an investment trust, valuing it using its P/E ratio might not be the best thing to do even if the use of a share’s P/E ratio is one of Neff’s favoured procedures. So, what this shows is that even though we can seek investment advice from great investors, we should still view their advice more as a guideline rather than a fixed law. After all, investing is a flexible process and the best investment style for us is not something that can be mechanically copied from other investors – instead, it should be one that we’ve formed for ourselves.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.