Investing in REITs? Understand How to Read These REITs Data First
What Exactly Are REITs?
Reits, also known as “Real Estate Investment Trust” is a real estate corporation that possesses, manage, and fund income-generating real estate. In the context of Singapore, these real estate companies offer shares to the masses, in the form of a collective investment portfolio of several properties such as hotels, shopping malls, offices, or serviced apartments that would further make the REITs as a whole, attractive. As a unit trust holder, the investment objective investors should have for REITs should not differ much from that of a company stock/share. Listed REITs that are offered from listed companies can usually be found on Singapore Exchange (SGX) and can be traded like any other listed securities.
What to expect from REITs?
REITs generate their income from real estate rentals and capital gains from profit-making properties, in return yielding dividend income to REIT holders. With the right foresight and thorough homework done, REIT investors will be able to generate regular decent returns as their earnings are usually being acquired from payment of rents from contract binding leases with fixed tenures most of the time. That being said, no matter how lucrative and appealing it may sound, REITs, also like any other investment instrument, entails considerable risks such as how these collective groups of properties perform would directly affect the dividend payout to REIT holders. What investors should have as their end goal through investing in REITs is to achieve a long term appreciation and current income distribution.
What Financial Data To Look Out For In REITs?
Here is a comprehensive checklist that one should look out for:
- Distributable Income Available
- Distribution per Unit
- Distribution Yield
- Gearing Ratio
- Bank’s Interest Rates to the REIT
- Rental Reversion
- Gross Revenue
- Net Property Income
Distribution Income Available
Referencing from Capitacommercial Trust, there is a rise in the distributable income available from the 4th quarter in 2016 vs the exact same time period, the 4th quarter in 2017. Distributable income available is the amount that can be distributed to unit trust holders.
*Keep a look out for REITs that has a good performance when it comes to distributable income.*
Distribution Per Unit (DPU)
With reference to Mapletree Industrial Trust, Distribution per unit, also known as DPU derives from Amount available for distribution(AAFD) / total number of units outstanding. This is where you are able to accurately calculate the dividend that you will be receiving for each individual REIT holder.
REIT holder A possesses 1,000 shares worth of Mapletree Industrial Trust, the DPU for 3QFY17/18 is 2.88 cents per Unit. Hence, REIT holder A would be expecting S$28.80 worth of Dividends for his payout.
In order to estimate the annual payout for the year, since 2.88 DPU is only till the 3rd quarter,
2.88 x 4 quarters of a year = 11.52 DPU for the whole year.
Utilizing REIT holder A’s share of 1,000 (1,000 x 11.52) = S$115.2 worth of dividends for the whole year.
*Interested REIT holders should spot REITs that has a positive growth in terms of DPU as this would increase their chance of receiving a higher payout for the year.*
Distribution Yield equates to the difference between (DPU a REIT investor is entitled to) against (the cost of each share price he has to fork out).
Formula: Annual DPU/Share Price (Keppel DC REIT has taken the liberty to calculate the distribution yield for investors instead, do not expect ALL REIT companies to do that). The average yield range for REITs in Singapore typically exists between the 6 – 7% yield. Referencing from Keppel DC REIT, 4.98% is considered to be marginally low reason may be due to this REIT being safer in terms of risks.
Lower Risks = Lower Yield
This cannot be considered as the main determinant as there might be other factors that might make this REIT much attractive than others.
*REIT holders who are rather conservative should only qualify or invest in REITs that are between the 6 – 7% Distribution Yield percentile range. Do exercise precaution if investors wish to still take on REITs with Distribution Yields that is out of the range of 6 – 7%.*
Gearing Ratio is also commonly known as leverage.
Formula: Total Amount of Debt / Total Value of ALL properties under that REIT’s Portfolio
Fraser Commercial Trust has a healthy gearing ratio of 34.8%. Typically, Singapore REITs have a healthy gearing ratio between 32% – 36%. Since Fraser Commercial Trust falls in between the healthy gearing range, this would be a REIT that can be considered investing in.
Gearing Ratio should be an indicator to REIT investors how much leverage they have as a REIT. Having a higher gearing ratio can sometimes command a lower interest rate from banks as they have higher leverage, as compared to a lower gearing ratio where banks will charge them a higher interest rate for their payments.
*Look out for REITs with a gearing ratio that is not too far off from historical records.*
Bank’s Interest Rates to the REIT
Interest rates charged by banks are usually disclosed to investors. In most cases, a REIT that has powerful sponsors backing them would have lower interest rates vs those who do not have. Corporations that has overseas real estate under their portfolio will usually be given a higher interest rate due to the financial risks involved.
Keppel REIT has an ALL-in interest rate of 2.62%, which is deemed to be a lower interest rate as famous REITs interest rates usually fall between 2 – 3%.
*Keep a look out for REITs with interest rates that fall between the 2 – 3%.*
Single out REITs with positive rental revisions as this would signify if rental leases signed in that quarter have increased or dipped. Negative rental reversions such as SPH REITs of (10.6%) in their 1st quarter of FY17/18 goes to show that rental charges are lowered as compared to previous tenants, hence this would indirectly affect the gross revenue, Distribution per unit (DPU), Amount Available For Distribution (AAFD), and net property income, resulting in lower dividend payouts to REIT holders.
*Ensure that the REITs have a positive Rental Reversion whenever qualifying them.*
Gross revenue of a REIT depicts how much asset it has amassed under its portfolio. Referencing from Capitaland Mall Trust’s Gross revenue, there is an increase as compared from the same period of 4th Quarter, hence this would act as a favourable factor when considering which REIT to invest in.
Gross revenue would be the units that you have leased out, where tenants make payment for the rents without excluding any maintenance fees, electricity, etc misc. fees.
*Spot REITs preferably that has a good track record of their gross revenue increase compared from previous periods.*
Net Property Income
With reference to Suntec REIT, there is an increase in net property income compared to the same period the previous year. Net property income is what is left after deducting the maintenance of the real estate, such as electricity, property tax, maintenance work.
*REIT investors should single out REITs with a good historical record of increased net property income.*
Rule of Thumb: What To Keep An Eye On
Below are some tips and what kind of information one should look out especially for interested parties who are keen in investing in REITs.
- Gather info of past historical records of the REIT trustee and manager’s performance
- Find out what does the REIT comprise of, e.g. what type of properties (Office, Retail, Hospitality, Industrial), geographical and sector exposures, overall financial outlook of that particular country, and if the country is prone to any political risks
- If there are commercial real estate spaces, find out the occupancy rate, branding and reputation of the shopping mall, and tenant mix
- Gearing (Leverage) and debt maturity of that particular REIT
- If any, distinctive quality of that REIT which may foster further risks?
- Find out when would dividend payout usually be, any scenario where payouts would be delayed or no payouts due to cashflow problems or depreciation of portfolio properties?
There is never a specific period or instant for investors to invest in REITs. While Singapore’s economy is declining in recent years, the general rule of thumb to investing REITs is to put your money with those who are able to better manage and upkeep the consistency of these properties to secure that steady flow of dividend payout you are looking for. Do not make rash decisions just based on those REITs that have high reported yields, but rather take the time to go through that particular REITs prospectus to see if it is an appropriate REIT you are willing to bet on and project a timeline for your investment.