Where to Next for SPH REIT? Part 1

SPH REIT (SGX: SK6U) has outperformed the market since its initial public offering in 2013.

The real estate investment trust’s unit price has recorded a total return (where gains from reinvested dividends are accounted for) of 16% from 24 July 2013 (the REIT’s IPO date) to Wednesday.

By comparison, the selfsame figure over the same duration for the SPDR STI ETF (SGX: ES3), a proxy for the market benchmark the Straits Times Index (SGX: ^STI), was just 11.7%.

Being a unit-holder of a REIT gives you partial ownership of all the real estate that it owns. In the case of SPH 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 dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

Over the past six quarters since its IPO, SPH REIT has distributed a steady dividend totaling around 9 Singapore cents per share.

Financial Quarter Dividend per share (Singapore cents)
Partial period 0.56
Q1 FY2014 1.30
Q2 FY2014 1.39
Q3 FY2014 1.35
Q4 FY2014 1.39
Q1 FY2015 1.33
Q2 FY2015 1.40

Source: SPH REIT’s earnings presentation

So while the returns from SPH REIT have been fashionable, as Foolish investors, we should look behind the curtains to understand how sustainable its 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. SPH REIT is an owner of two retail malls in Singapore, namely Paragon and Clementi Mall. Its main sponsor, manager, and major owner would be Singapore Press Holdings Limited  (SGX: T39).

SPH REIT - revenue

Source: SPH REIT’s earnings presentation

Overall, quarterly revenue for SPH REIT expanded by 5.5% over the last six quarters examined above. For the six months ended 28 February 2015, Paragon made up 81% of SPH REIT’s gross revenue, making it by far the largest revenue contributor. By virtue of its relative size, Paragon also contributed most of the revenue growth over the last six quarters.

As such, Paragon may be the property we have to keep our eyes on in the future.

Foolish summary

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in a REIT’s unit price is supported by the quality of growth that we are looking for.

The exercise above is to look at the sales dynamics of SPH REIT alone. As a next step, we should observe if the top-line growth trickles down to the bottom-line in order for it to sustain its growth in price.

But, that’s for the next article.

SPH REIT last traded at S$1.07 on Wednesday. This translates to a historical price-to-book ratio of 1.15 and a trailing-12-months distribution yield of around 5.1%.

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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 doesn’t own shares in any companies mentioned.