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Where to Next for SPH REIT? Part 2

Welcome to the second part of the series covering SPH REIT’s (SGX: SK6U) business fundamentals. In my previous article, I covered the revenue dynamics for the real estate investment trust.

In here, let’s look at the REIT’s net property income and debt profile.

As a recap: SPH REIT 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%.

Over the past six quarters since the IPO, SPH REIT has distributed a steady dividend totaling around 9 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

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).

A closer look

Ideally, we would like to see the revenue dollars drip down to the bottom-line. For a look into that, we can observe the Net Property Income (NPI) of the properties. The NPI is defined as the gross rental revenue of a property minus all related expenses.

SPH REIT - NPI

Source: SPH REIT’s earnings presentation

Over the six quarters above, the NPI for SPH REIT grew by about 11.5%. The pace of growth is faster than its revenue, so that’s a positive sign. It should be no surprise that Paragon was the primary contributor to NPI, with 82.6% of SPH REIT’s total NPI. The property also contributed to most of the growth in NPI that SPH REIT has experienced in the time period above.

Currently, part of the distributable income for SPH REIT comes from income support but fortunately, that’s relatively small in the grand scheme of things.

Finally, Foolish investors might also want to look at the debt profile of SPH REIT. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the REIT’s latest quarterly earnings presentation for the quarter ended 28 February 2015.

Gearing ratio 26%
Weighted Average Term to Maturity 3.5 years
All-in interest rate 2.50%
Fixed Rate Borrowings 54.7%
Total Borrowings $850 million

Source: SPH REIT’s earnings presentation

Overall, SPH REIT’s low gearing ratio suggests that it may have some room to expand in the future.

The real test in flexibility of funding for SPH REIT will come in 2016 and 2018, when $250 million and $300 million in loans, respectively, become due. Furthermore, since the borrowings that come due in 2016 are based on floating interest rates, investors would have to keep an eye on how this debt will be refinanced when the time comes.

Foolish summary

In all, its still early days for SPH REIT. The REIT only has two properties currently, and is dependent on the performance of both.

Foolish long-term investors should be looking at the REIT’s future acquisitions to better gauge its attractiveness as an investment for the long-term.

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.