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What does the Future Hold for Suntec REIT?

Suntec Real Estate Investment Trust (SGX:T82U) has outperformed over the last five plus years. The share price recorded returns of about 152% from 1 Jan 2009 to the closing price on last Friday (7 November 2014). Over the past five financial years, the Real Estate Investment Trust (REIT) has also paid out a total exceeding 50 cents in distributions. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 77% for the same duration.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. In the case of this REIT, it has offices and shopping malls under its umbrella. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as distributions to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

So, while the returns from Suntec REIT has been fashionable — as Foolish investors, we should look behind the curtains to understand how sustainable the distributions are, and how it can grow.

A closer look

To get a sense of the resilience of the property portfolio, we can look at the gross revenue by property of the REIT. At the local front, Suntec REIT has full ownership of Park Mall and Suntec City. It also has one-third interest each of One Raffles Quay, Marina Bay Financial Centre (Tower 1 and Tower 2) and the Marine Bay Link Mall. On 15 November 2013, the REIT announced a maiden development project for a freehold office building in Australia. The project is expected to be completed in early 2016.

suntec REIT graph 1

Source: REIT company earnings report

The gross revenue covers the fully owned buildings by the REIT. From this view, Suntec City, which consists of offices and malls, makes up the bulk of the gross revenue. The gross revenue for Suntec City noticeably dipped in the financial year ended 2014. This might be due to the significant asset enhancement works (AEI) which was executed in three phases. The first phase was completed in 2013, while the second phase was completed in mid-2014. The last phase is expected to complete by the end of 2014. On the flipside, it sold also off its stake in Chijmes in 27 October 2011.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the Net Property Income (NPI) of the properties. The NPI is defined as the gross rental revenue of a property minus all related expenses. The partial ownership of buildings (50% stake or less) are represented by dividend income made to Suntec REIT.

suntec REIT graph 2

Source: REIT company earnings report

As expected, the NPI was mainly contributed by Suntec City. The fall in NPI for the past three years was offset by dividends income received from its partial ownerships of One Raffles Quay, Marina Bay Financial Centre (Tower 1 and Tower 2) and the Marine Bay Link Mall.

The other income in the chart above primarily comes from rental support. As my fellow Fool Ser Jing shared before, rental support is a factor to be wary of in REITs. We should keep an eye on the NPI and dividend income to make sure that any drops in the rental support is made up by new rentals secured.

Finally, Foolish investors might also want to look at the debt profile of the REIT. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the latest quarterly earnings presentation for the quarter ended 30 September 2014.

Aggregate Leverage 35.5%
Interest Coverage Ratio 4.6
Weighted Average Term to Expiry 3.9 years
All-in Financing Cost 2.42%
Debt Outstanding $2.9 billion

Source: REIT earnings presentation

It is worth to note that Suntec REIT does not have any refinancing needs for 2014 and 2015.

Foolish take away

Despite its outperformance of the SPDR STI ETF, Suntec REIT’s distribution per unit growth has been relatively flat for the past four years. Much of its gross revenue and NPI comes from Suntec City, therefore we should keep out on how much impact the third phase of its AEI has in attracting consumers back to the building.

As of last Friday’s (7 November 2014) closing price of $1.86, Suntec REIT traded at a price-to-book ratio of around 0.91, and has a dividend yield of around 5%.

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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 Chin Hui Leong owns shares in Suntec REIT.