REITs Symposium 2018: Keywords YOU need to look out for!
With engaging panel discussions and presentations hosted by the various REITs, as well as the launch of the comprehensive Singapore REITs Quick Facts book by ShareInvestor, the event participants went home with an even deeper understanding of the world of Real Estate Investment Trust investing.
Most investors would be very familiar with the REITs in Singapore, particularly if they have a preference for safe investment assets with a good yield, and Singapore REITs have performed well on that point. For the most part, Singapore REIT dividend yields have been higher than the 5% yield from the FTSE ST REIT Index, the 3% yield from the Straits Times Index, the 2.5% interest rate from the CPF Ordinary Account and the 2.29% 10-year Government Bond Yield.
MayBank Kim Eng’s Head of Education Dr Kee Wei Loon also explained that REITs investment acts as a good alternative to property investment. As Kee pointed out, Singapore’s property price index had risen by more than 15 times since 1975. In comparison, Singapore’s oldest listed REIT Capitaland Mall Trust offers a CAGR of 10% since its listing in 2002, while the second oldest listed REIT, Ascendas REIT, had a CAGR of 14% from its listing in 2002. Kee also noted that the emergence of REIT Exchange Traded Funds in 2017, further offers a diversified alternative for REIT investors in Singapore.
Singapore currently has over 70 listed REITs and business trusts, and more new REITs are consistently being added to the fold. One of the key reasons for the popularity of Singapore listed REITs is the robust REIT regime established by Singapore Exchange, according to Geoff Howie, the Market Strategist of SGX.
“Our REIT regime here in Singapore is very successful on a comparative basis from the regimes across Asia Pacific,” explained Howie. “Some of the strengths include a good comparative gearing ratio of 45% for all the REITs, the rule that 75% of the funds deposited must be in income producing real estate, the third was that individuals are tax exempt when holding the REIT units, and of course we had the rule that at least 90% of distributable income should be distributed to the unitholders. And then of course, the external manager must have at least 5 years of experience.”
If you are interested in REITs investing in Singapore and didn’t have the opportunity to attend the event to learn more, here are the 8 keywords ZUU online learned to listen out for when evaluating a Singapore REIT.
This is the first thing most REIT investors look out for before investing in a REIT. DPU (or distributions per unit) are the cash payouts given to unitholders of a REIT, akin to the dividend payouts by listed companies to their shareholders. Most REITs in Singapore payout their distributions on a quarterly basis.
For older REITs like CapitaLand Mall Trust, the REIT’s total distributions to date have already exceeded its IPO price.
Another related term is a REITs’ dividend yield, which is its DPU in relation to the REIT’s current price. The higher the REIT’s share price, the lower its yields are. A REIT’s dividend yield is one method for investors to compare one REIT with another.
A REIT’s WALE (or Weighted Average Lease Expiry) tells you when the majority of its tenants’ leases are expiring. This can be an area of concern if a REIT’s tenants are experiencing economic difficulties and may choose not to renew their leases.
Some REITs choose to lock in rentals for a longer period, with a built-in rental escalation. That means rentals will automatically increase by an agreed percentage after a set number of years. However, not all REITs have the luxury of doing that.
Another closely related term to look at is the REITs’ portfolio occupancy. That number would tell you how much of its available rental portfolio is occupied, and how much of it remains unleased. It is also useful to see how this number has changed over the past few years. A growing occupancy rate, is an encouraging sign, which may indicate a growing demand for the REIT’s properties.
While the converse may be true, it also bears noting if a falling occupancy is a result of AEI activities (which we discuss in point 5), or the result of something else more concerning.
3. Tenant mix
Does a REIT’s tenants come from just one or two industries? Do any of its tenants represent a large percentage of its portfolio? If the answer is yes to any of these questions, investors may be concerned if the REIT’s income is overly reliant on just a few industries or tenants.
A well-diversified tenant mix would typically ensure that a REIT’s income is less susceptible to a downturn in any particular sector. This is particularly true for retail and commercial REITs.
On the other hand, a hospitality REIT like OUE Hospitality Trust would typically have a small handful of master lessees for its hotels business, and it would be meaningless to look at its tenant mix in that regard. You would instead look at its customer profile mix for its portfolio hotels, Crowne Plaza Changi Airport and Mandarin Orchard Singapore. Nearly half of OUE Hospitality Trust’s hotel customers are transient customers, or individual travelers. Another 26% of them are corporate customers, while the remaining 24% come from tour agency bulk bookings.
These tell you about the pipeline of new properties that the REIT will get its new properties from. As you might have guessed, more properties means more rental income in future. So it is a good idea to know where the next growth in their income will come from.
A REIT’s Sponsor is typically a property developer that will offer to sell its completed and matured properties to the REIT on a Right Of First Refusal (ROFR) basis.
For instance, Ascendas Investments, a real estate development, investment and capital management company, is the sponsor to the 4 SGX-listed Mapletree REITs: Mapletree Logistics Trust, Mapletree Industrial Trust, Mapletree Commercial Trust, and Mapletree Greater China Commercial Trust.
AEI or Asset Enhancement Initiatives, is another growth engine for REITs to generate a higher rental income. Some AEIs may include optimizing the existing gross floor area available so it better suits its tenants’ needs, through a renovation or retrofitting. It might also include the building of an extension to an existing building, to increase the effective floor area and in turn, the net lettable area.
6. Interest Cover Ratio
A REIT’s interest cover ratio indicates its ability to pay off its interest based on its earnings. It is calculated by dividing a REIT’s earnings before interest and tax (EBIT) by its interest expense.
A higher interest cover ratio is an important signal to the financial health of the REIT. Many REITs typically have healthy interest cover ratios of between 3 and 4 times. Frasers Centrepoint Trust reported a 6.64 times interest cover ratio in its most recent quarterly results.
7. Debt Maturity
REITs typically borrow funds from the banks in order to fund new property acquisitions. So as a REIT investor, it is essential to know when the REIT’s debt is maturing and whether they would be able to negotiate for new loans from the banks.
An important point to note from those discussions is the REIT’s effective interest rate upon renewal of its loans. If effective interest rates increase, that means the cost of borrowing has increased and that would in turn affect the REIT’s profitability.
Another area to note is the REIT’s debt headroom. How much more can the REIT borrow before hitting the 45% borrowing limit set by the SGX? The greater headroom a REIT has, the greater their ability to make a property acquisition when the opportunity arises.
FCT reported a gearing ratio of 29.2%, while OUE Commercial REIT had a gearing ratio of 40.5% in its latest quarter. Both are well below the gearing limit of 45%.
8. Other unique features?
In recent years, there are been a number of newly listed REITs with overseas property assets providing local investors with the opportunity to invest in the economic growth of global markets.
That includes the newly listed Sasseur REIT (pronounced Sa-Sur) which owns outlet malls in China, which is reportedly a fast growing business that could rival the e-commerce industry. Manulife US REIT owns properties in the United States, while EC World REIT owns Chinese e-commerce warehouse spaces that allow pickers to pick and pack.
Some other unique REITs include Keppel DC REIT, which is an industrial REIT specializing in data centres. Investors could look at it for exposure into the growing cloud technology sector.
These are just some of the keywords and areas that investors should look into before investing in a REIT in Singapore. It is certainly not exhaustive, but would be a good start for any new investor, until the next REITs Symposium rolls round in 2019.