1. Is there an increasing Distribution Per Unit year on year
As investors, we will want our Distribution Per Unit (DPU) to grow year on year which helps to offset the effect of inflation. A growing DPU also mean that the manager is competent and have their interest align with the unitholders.
A good example will be Frasers Centrepoint Trust (FCT) has managed to grow its DPU from 6.55 to 12.085 cents every year since Financial Year 2007 to 2021 except for FY2020 (when it was affected by COVID-19) as shown in the graph below.
2. Positive Rental Reversions
Rental Reversion is a metric captured by REITs to show whether new leases signed have higher or lower rental rates than before. It is an useful indicator for investors to assess if a REIT is able to grow its revenue.
REITS with a history of positive rental reversion are welcomed by investors as positive rental reversion in the properties will usually contribute to a rise in DPU. It also assures the investors that the properties are sought after and well managed by the REIT. Vice Versa, a negative rental reversion will lead to a drop in DPU. I will avoid those REITS with negative rental reversions unless due to unusual circumstances like COVID.
However, currently for REITS, there is no consistent way to calculate rental reversions and it is not a mandatory disclosure requirement.
From the latest press release of FCT on 27 Apr 2022, positive rental reversion of 1.73% (See table below) was achieved on an incoming versus outgoing basis for 14.4% of FCT retail portfolio’s total net lettable area in 1H2022. This keeps investors optimistic that the retail sector is on the road to recovery after COVID’s impact. With the easing of restrictions on group size and dining-in, increased in footfall is anticipated.
3. Occupancy Level
The assets under management with 100% occupancy rate or above average industry occupancy level suggest its attractiveness to the tenants and the proactiveness of the REIT manager.
FCT has a healthy retail portfolio occupancy level at 97.8%. Most of the properties are close to 95% occupied except for the office property, Central Plaza. An anchor tenant has exited the office premise before 31 Dec 2021 bringing the occupancy level to 71.7%. FCT has managed to bump up the occupancy level by 5.6% from 71.7% to 77.3% as at 31 Mar 2022.
4. The locational attributes of the properties
For example, if the REIT owns retail malls, it is critical for them to be easily accessible being near transportation nodes like MRT and bus interchanges which would mean there is usually a high pedestrian flow which in turn increase the chance of spending by customers.
In the case of FCT, the suburban malls owned (view map below) are well located as they are either next to MRT or within walking distances and near high-density housings. Suburban malls are also more resilient as they have a large catchment of locals residents hence not so dependent on tourist compared to shopping malls in town areas. Locals likely will still frequent the suburban malls for essential services during a recession.
5. Choose a REIT with a strong sponsor
Most of the Singapore REITS are supported by a sponsor. The sponsor usually injects their own properties into the initial portfolio of the REIT when listing on the stock exchange.
Most of the time, such REITs are granted a right of first refusal to the Sponsor’s assets, enabling the REIT to leverage on the Sponsor’s strong network and pipeline of assets. When the Sponsor wants to sell its property asset, the REIT will be offered the right to purchase the asset first before it is being offered to the market.
A strong sponsor provides opportunities to grow the REIT by making new acquisition of new assets or making Asset Enhancement Initiatives (AEI) to existing properties. Investors should examine if the REIT has a track record of growing the DPU through acquisitions of new properties or making AEI.
History has also shown that most REITS with a strong Sponsor were better positioned to withstand the difficult times through their Sponsor’s support in terms of rights issuance or to obtain favorable interest rates for loans.
FCT is managed by Frasers Centrepoint Asset Management Ltd, a real estate management company and a wholly owned subsidiary of Frasers Property Limited. Frasers Property Limited is perceived as a strong sponsor being listed on Main Board of the Singapore Exchange Securities Trading Limited and has total assets of approximately $40.3 billions as at 30 Sept 2021.
The latest acquisition by FCT was remaining stake in AsiaRetail Fund Limited in Sep 2020 was DPU accretive which bring cheer to investor’s wallet.
6. Yield of the REIT should be more than 6%
Personally, I will only look at REITS that have yield of more than 6% as anything lower than that will lose its attractiveness to investors as they can find comparable yields in instruments like bonds.
I may consider REITS of 5% yield only if they are very stable and have a track record of increasing their DPU among other factors. It also depends on the type of REITS that I hold. Hospitality and offices which are more cyclical in nature, I would prefer it to have a yield of around 8% or more as their income will fluctuate more as compare to a healthcare REIT.
Our risk appetite are different so some investors may demand an even higher yield across different type of REITS.
Don’t chase after high yielding REITS as there are reasons why some offer higher yield than the others. Some of them are not well received because they have a history of falling DPU or they are currently facing some issues such as tenant default, termination of leases by tenants and etc. It is critical for a REIT investor to find out the story behind a high yielding REIT before investing your hard earned money in it.
Based on the recent transacted price of $2.43 for FCT and 2021 DPU of $0.12085, the yield is around 5% which seems reasonable but not very attractive.
7. Gearing ratio
Gearing ratio is the ratio of a REIT’s total borrowings to its total assets. As Real Estate Investment Trusts (REITS) have to distribute at least 90% of their income, it is hard for them to retain cash and hence they will need to take on debts. A high gearing ratio will mean more risk to the DPU as it imply higher interest expenses when financing cost rises.
Highly leveraged REIT may also find it hard to fund an acquisition of potential property without turning to placement, rights etc. In Singapore, REITS have a limit of 50% in gearing ratio.
A gearing ratio below 35% will be safer in my view. If the cost of debt is very cheap with a low effective interest rate, leverage of below 40% is acceptable as well.
FCT has a current gearing ratio of 33.3% which gives them sufficient headroom for future acquisitions.
8. Interest Coverage Ratio
The Interest Coverage Ratio (ICR) measures the ability of a REIT to repay its debt obligations, as to how many times its earnings can cover the interest expenses. ICR is calculated by dividing the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) over the interest expenses. Below shows a formula of ICR.
There are some variations though such as from Monetary Authority of Singapore which defined the ICR as trailing 12 months EBITDA (exclude effects of fair value gain from derivatives and investment properties and foreign exchange translation) divided by the trailing 12 months interest expenses and borrowings-related fees.
Most industry experts will agree that an ICR of over 5 as safe for the REIT.
As of 31 Mar 2022, FCT has an ICR of around 5.72 times which does meet the safety checkbox.
9. Land tenure of properties whether leasehold or freehold.
Whether the properties are leasehold or freehold, money has to be spent to upkeep the properties. But for leasehold properties when the lease run up, the REIT manager has to top up the leases to the land at a cost. If lease top ups are not allowed, they may have to dispose them or if they continue holding it till lease expiry will face a decrease in the rental income when the lease ends.
Typically, a good REIT manager will sell off the short lease property property at a gain then deploy the proceeds into a freehold property or a longer leasehold property at good locations. Hence, I tend to prefer properties with long leases or properties that are freehold.
FCT has a Singapore retail portfolio that comprises 9 suburban retail malls and 1 office property at Central Plaza. FCT also owns 31.15% in Hektar REIT which consists of 6 shopping centers (include a mixed retail with hotel) in Malaysia. Below table shows the average land leases left of around 70 years for the Singapore portfolio (exclude Malaysia portfolio). The long land leases is a positive for me.
10. Whether the current price is significantly above the Net Asset Value
In the event the REIT is liquidated, unitholder should get back monies similar to the Net Asset Value (NAV) per unit. Hence, REIT investor should be cautious if the REIT is trading at at a price that is significantly higher than the NAV.
NAV Per Unit = (Assets Market Value – Liabilities Value) ÷ Number of Units
FCT has a current NAV of $2.31 which is close to the transacted price of $2.43 which suggests the price is not cheap but not too overvalued.
Concluding Remarks
Above are salient factors in my checklist when investing in REITS with Frasers Centrepoint Trust as an example. There are other considerations as well. Please conduct your own research before investing in REITS.
Disclaimer: I own units of Frasers Centrepoint Trust.