Choosing your first REIT to invest in

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With S$10,000 to invest in the stock market, which REIT should you pick to get started with? How do you get started? How do you choose a REIT to invest in? What methods, details and things should you look out for?

This post will provide you with beginner, intermediate and advanced considerations before investing in any one of the 37 REITs listed on the SGX.

Let’s get started with the ‘beginner’ considerations

What do you know?

REITs are simply an instrument used to channel revenue from property into the hands of shareholders, you. These are the main classes of real estate assets

  • Office (in the CBD, suburban areas etc)
  • Retail (shopping malls)
  • Industrial (warehouses, tin sheds, logistics)
  • Residential (not so common in Singapore)
  • Hospitality (serviced apartments, hotels)
  • Healthcare (hospitals, aged homes)
  • Data centre

Ask yourself this question – which are you most familiar with?

Invest in the REIT that has properties in the category that you are most familiar with. You won’t have to do much reading up and google-fu to understand a new sector, and like Warren Buffet, you invest in what you understand.

How do you know what assets a REIT invests in? The name of the REIT usually tells you what they invest in.

REIT sector
REIT sector

If you can’t tell from the name – a quick Google search of the REIT will show it to you.

You will usually be able to tell from the name.

Dividend yields

REITs are well known to be dividend cash machines. Their average yield is about 6 to 6.5%. What does this mean?

If you had invested S$10,000 in a REIT that gives you a 6% dividend yield, you get an allowance of $600 a year (S$10,000 times 6%). This translates into about S$50 a month. Seems measly? You would have gotten only S$25 a month if you had invested in the STI ETF.

A safe rule of thumb is to invest in REITs that provide you a dividend yield of 6%.

Now where do you get this information?

Investor education tools and blogs

SGX Stockfacts is your friend

There are also plenty of blogs and courses that provide good information and armchair commentary on REITs.

Historical price trend

One of the most objective measures of how a REIT performs is seen in their stock price.

Some may argue that historical trends don’t tell much about the future. I partly agree.

Would you invest in a stock that displays this historical trend?

Highly unlikely, unless one reads more about the stock. FYI, the stock is Sabana REIT.

If you believe that the market is right, historical stock prices can show how well or not the REIT has been managed.

In the case above, Sabana REIT was indeed not well managed and it was shown in the share price.

You would save yourself a lot of headache if you first took a look at the price movement.

What does the REIT own?

This information can be found in the home page of REITs, usually under the”Portfolio” section.

Like below.

This tells you the name of the properties, and usually the type of asset (office, retail mall, industrial building etc.)

Be careful with overseas properties

As a beginner investor, stay away from REITs that hold overseas properties. Why?

With overseas properties, a REIT has to have much more intensive management because of foreign exchange risk. A mall in China receives revenue in RMB, but this has to be converted to SGD to be paid to unitholders. There is a risk a shareholder in Singapore receives less SGD because the SGD has depreciated relative to RMB.

While the REIT manager can hedge their foreign currency exposure, it is not so straightforward and the REIT manager needs to have the capability and skill to carry out the function.

With overseas properties, the REIT manager who is always based in Singapore (SGX requires the CEO and majority of the team to be based in Singapore) need to travel to the country. This will incur airfares, travel and accommodation cost which will eat into the amount of money that can be distributed to shareholders. REITs that hold Singapore properties incur less of such costs, because the properties are well, located in the country.

Examples of REITs with overseas properties include BHG Retail REIT (China), EC World REIT (China), Frasers Logistics and Industrial Trust (Australia), Starhill Global REIT (Malaysia, China), Capitaland Retail China Trust (China).

As an investor, you also are not able to easily see overseas properties physically, unless you want to visit them while on holiday.

Which brings me to the last point for the beginner section…

Take a walk, literally

Real estate investing is a very local game. This means that location plays a very big role in the success of failure of a building.

As an investor, you certainly want to know what type of location the properties are in, whether they be in the city centre or a suburban/neighbourhood location.

If the assets are located in Singapore, one should be able to understand the location much easier because it is in the country. However, if the properties are overseas, it will take at least 2-3 trips before one becomes familiar with the ‘lay of the land’.

With the above, you should be able to narrow down from a list of 37 REITs to a few on what you’re comfortable investing in. No performance can be guaranteed, but the above will provide you a good framework to make sound investments.

On to considerations for a more intermediate investor.

Investor relations section

For the more adventurous investor, the investor relations section of REITs provide one of the best source of information for a REIT.

SGX mandates every REIT to clearly show the investor relations link on their website’s home page.

You can see the following for two examples.

Information in the Investor Relations section are usually

  • Quarterly results presentations
  • Financial statements
  • Research coverage
  • Annual reports
  • Newsroom announcements and press releases

With time, one can go through these material because they are an objective source of information on how the REIT is performing.

What exactly to look for in these reports and presentations is an entirely blog post for itself. Suffice to say, this is where one can get ‘primary’ data, as opposed to ‘secondary’ research by analysts and researchers.

Who’s who on the Board of Directors

The composition of the Board of Directors (BOD) is important because it shows how experienced the company is.

Information can always be found in “The Manager” section of most REIT websites.

What you want to look for are Boards that have directors with varied experience.

Past experience and companies worked for are a good indication of how much the directors know.

However, directors that have many seats on other boards do not necessarily translate to better performance compared with directors who have less representation on other boards. Everyone has 24 hours, and more board representations means the director has to allocate his time and energy to more directorship demands.

Companies with strong sponsors (e.g. Mapletree, Ascendas, Capitaland) usually have Board of Directors that are very reputable and deep in terms of experience, education and work exposure.

Who’s managing the REIT

Another level of consideration on how the REIT is managed is in the staff strength of the immediate team.

Similar to the Board of Directors, the capability of the REIT management team is crucial to the success of the REIT.

Staff strength can be determined by educational experience, past careers, number of staff managing the REIT and staff turnover etc.

Compared to the Board of Directors, the REIT managers have a greater impact on how well the REIT performs because this team is the one that is directly involved in the day to day operations of the REIT.

Day to day operations include leasing, marketing, engineering, deal sourcing/business development, accounting, tax, finance, investor relations, compliance etc.

REITs are usually quite lean in terms of staff strength, so REITs that have a strong sponsor usually benefit most, as the REIT management team can tap on the Group/Parent’s expertise.

Equity research reports

In addition to, SGX stockfacts which provides factual information regarding REITs, investors can go to sginvestor.io for a collection of equity research reports.

What’s the difference?

Sginvestor.io collates the research reports by analysts and publishes them. If you’re not on the mailing list of these analysts, you aren’t able to get them. The website must have some way of obtaining these reports on a timely basis so it saves investors the hassle of subscribing to each analyst.

Reports are usually a 2-3min read and provide investors with a buy, hold or sell recommendation.

I don’t recommend anyone act upon the recommendations at face value without further understanding of the stock, but this is a good place to start.

Navigate to the S-REITs section at SGinvestors.io homepage
REITs sorted in alphabetical order

Trends in the sector

As part of the effort to understand the REIT, one cannot forget the broader picture.

For example, if you buy a retail REIT with malls in Singapore, do you know how shopping malls in Singapore are doing generally? Are you aware that consumer shopping preferences may be changing?

If you buy a healthcare REIT, are you aware that there is an ageing population (good for the REIT in general)?

If you buy a data centre REIT, do you know if the data storage, cloud computing trend is going to continue? Will there be a major technological breakthrough that may impact the REIT (in both good and bad ways?)

While developments in the broader environment don’t always trickle down to impact the REIT performance, i.e. a REIT can still thrive in a lacklustre and challenging environment, it makes it all the much harder.

Just take a look at how industrial REITs like Sabana, AIMS AMP, Cache Logistics with many warehouses and ‘tin-shed’l like assets have been impacted since 2013 when the Singapore government decided to move lower-value added industrial activity to Malaysia. On the other hand, Ascendas REIT has held fairly well because their assets composed of business parks, which house higher-value added industrial activity like research and tech manufacturing.

Poor performing AIMS AMP REIT
Poor performing cache logistics trust

Ascendas REIT share price holding up decently

Price to book values

Similar to distribution yield, the price to book value is a financial metric that tells investors how much they are paying for a dollar of the company

P/B values below 1 indicate potential undervalue, while those above 1 indicate potential overvalue.

However, for the advanced reader, it is not so straightforward. A value above 1 may mean the market is anticipating book value (the denominator) to increase in future, that’s why they are willing to pay a higher share price now, in anticipation that the book value will rise.

Book value rises for a few reasons such as less debt in the balance sheet, increase in valuation of properties, acquisitions of good performing assets at a notable discount to valuation etc.

One example of a stock with a high P/B value is Keppel DC REIT. I suspect the market is putting faith in the manager in its ability to increase the book value of the company. Add to that, the data centre is sector is in a growth phase.

Cornerstone investors

Presence of large institutional investors in a REIT signal confidence to the market by their mere being around.

The impact extends to being a ‘big brother’ who usually can be counted to be there in times of need and network effects that can assist the REIT manager in their day to day operations.

How to identify the presence of large investors?

Simply google “Temasek” + “REIT”.

Why Temasek? Unlike GIC, Temasek can invest in Singapore listed stocks. While some may question the ability of Temasek to provide returns, it can’t be doubted that they are a strong institutional investor with large amounts of cash to spare. Corporate governance of the company can be considered very strong.

Quick search shows that Temasek has significant stakes in Keppel, Capitaland, Ascendas Singbridge and Mapletree.

Temasek’s stake in Ascendas-Singbridge and Mapletree
Temasek’s stake in Capitaland, and their REITs
Teamsek’s stake in Mapletree

Attend AGMs

There’s no better way to get information (and free food) than to attend publicly listed companies’ AGM.

Unfortunately, free food is a thing of the past as companies become smarter and know that shareholders are there just for the free food. You’ll be happy if you get free drinks at AGMs these days.

Singapore Association of the Institute of Chartered Secretaries and Administrators (SAICSA) provides a calendar showing when companies are holding their AGM. It’s not the prettiest nor most advanced, with it being held in Google Calendar, but it works.

AGMs gives investors the chance to quiz, no wait, question, no wait, dialogue with the REIT managers and Board of Directors. At the same time, there are other investors who are present who can raise interesting viewpoints and questions for you to consider.

Overall, it is likely to be a good learning experience.

If you don’t want to wait till AGMs before asking questions, you can try a hack by emailing the Investor Relations manager of the REITs with your questions. They are usually responsive as this involves unitholder/public money. SGX and MAS are very protective of investors, so the REIT manager are usually on their toes.

Quality of sponsor

Sponsor quality is important because sponsors are a source of expertise, staff, provide a pipeline property and provide brand name backing to the REIT.

Choose REITs with sponsors that are well-known, reputable, and have a track record of building and managing their own properties.

For example, when SPH set up their REIT, I heard from industry insiders that they tapped people in teams such as corporate development, finance, marketing from SPH’s parent group. These newly tapped staff simply needed to learn the rules and regulations of managing REITs and were armed with knowledge of the properties that were already being managed by SPH.

Reputable sponsors like Capitaland and Mapletree already have a track record of building, managing, acquiring and disposing of assets, so it is not difficult for them to set up a REIT with staff who have background knowledge.

Contrast this with overseas sponsors such as EC World, BHG and IREIT. These sponsors are based overseas and while their staff are familiar with the properties, they aren’t necessarily willing to relocate to Singapore. Furthermore, SGX requires that the CEO’s of REITs must be based in Singapore for corporate governance reasons.

In the case of BHG REIT, the sponsor is a retailer, much like Robinsons or Isetan and not a developer. While there are advantages conferred to being an expert retailer, they may not have such strong developer experience compared to Capitaland.

Leverage or gearing ratio

Leverage or gearing ratio is defined as the amount of debt over the total value of properties in the REIT’s portfolio. This number is easily obtainable in quarterly results briefings as disclosure is mandated by SGX.

The terms leverage or gearing are used interchangeably and mean the same thing.

Gearing ratios are approximately 35 to 36% on average across all REITs in Singapore.

Higher gearing ratios are not good for the REITs because it means they have more debt, which means more interest payment.

Lower gearing ratios are good because there is room for the REIT manager to use debt or loans in future acquisitions. Furthermore, if interest rates rise, there will be a smaller impact of higher interest payments compared with another REIT that has a high gearing ratio.

SPH REIT has the lowest gearing ratio of all Singapore REITs at about 25%.

First REIT’s gearing ratio

Suntec REIT’s gearing or leverage ratio

Cost of debt

Cost of debt refers to the average interest rate the REIT is paying to parties lending it money. These parties can be banks or those who bought the bonds sold by the REIT.

This information can be easily found in quarterly reports because it is mandated to be released by SGX.

Keppel, as a company with good credit quality, can achieve low interest rates in the low 2% range.

Keppel REIT’s cost of debt, alternatively called all-in interest rate

 Keppel DC REIT’s cost of debt

REITs with riskier credit profiles such as those with overseas assets naturally attract a higher cost of debt.

EC World REIT is one example where the average cost of debt is 5.4%. This is to compensate the lenders for the risk of assets being in China, foreign exchange risk, and lower credit quality of the borrower (EC World REIT) etc.

Why did the sponsor set up the REIT?

This may be a little difficult to find out but the reasons and motive behind setting up a REIT could impact the REIT’s performance.

Is the sponsor seeking to go asset light and using the REIT as a vehicle to dispose of assets at a high price so the parent can recognize big gains on its balance sheet? Is the sponsor genuinely interested to grow the REIT to a big size and is willing to help it during the gestation period?

One case that comes to mind is Keppel Corps. sale of Ocean Financial Centre to Keppel REIT at a high price with income support.

In essence, Keppel REIT paid a lofty amount of money for an asset that was worth less than what they paid. On the flip side, Keppel REIT was assured a certain amount of money/rental revenue for a period of time, guaranteed by Keppel Corp.

Is the deal fair? Ethical? Difficult to say as it’s not illegal in the eyes of SGX or MAS. It however raises some ethical and conflict-of-interest questions on the relationship between the sponsor and REIT.

Rental reversion

Rental reversion is a forward looking metric that provides investors with a clue to how the top line revenue will grow or decline in future.

There is no industry standard on how to calculate rental reversion, but the general idea is to find out how much more or less new tenants are paying compared to those who have vacated the space.

Positive and higher rental reversions are good while negative figures signal future impact on the portfolio’s revenue.

Accretive or dilutive investments

REITs generally should do accretive investments, though there is no stipulation by SGX to say so.

Accretive investments mean that, after the acquisition is completed, the distribution per unit rises. A dilutive investment, when completed, causes distribution per unit to fall.

Let’s see an example of an accretive, dilutive and questionable investment.

CRCT’s acquisiton of Galleria in Chengdu is an accretive investment because the DPU after acquisition is higher than before.

There aren’t a lot of dilutive investments done because for fear of shareholder backlash, but Sabana REIT’s acquisition of 47 Changi South is one example.

DPU dropped to 6.67 or 6.79 cents per unit after the acquisition. Ignore scenario 1 & 2 which are just internal calculations for the REIT manager.

Another example is the acquisition of 107 Eunos Ave 3.

Ascott serviced residence REIT’s acquisition of Ascott Orchard Singapore and two serviced residence properties in Germany is also highly dilutive.

Fraser Logistics and Industrial Trust’s acquisition of 7 properties (4 completed and 3 under development) is a little trickier because they are packaged together.

As a package, the acquisitions are accretive to DPU.

But, if only the completed properties were bought, the acquisition would be dilutive to DPU.

Heavy emphasis on “if only the completed properties were bought”.

Think about t.

7 properties are injected into FLT’s portfolio. By itself, the completed properties aren’t DPU accretive. The development properties are not contributing to revenue, as they aren’t completed and there are no paying tenants yet.

This means that revenue is going to take a hit in the time between the acquisition to when the development properties are completed.

Remember that the forecast is based on the rents that can be commanded by the development properties. If say, 1 or 2 years down the road the developments are completed but FLT either can’t get tenants, or they can’t get high paying tenants, the REIT’s revenue, and you the shareholder is going to suffer.

Nothing is really wrong here, since SGX did not say REITs must do accretive investments. But it appears that FLT is using the development properties to paper over the dilutiveness of the acquisition of the completed properties.

Remember also, the rents being commanded by the development properties are only a forecast. It may or may not materialize.

If you see the margin of improvement in DPU uplift for the whole package, it is only 5.38 – 5.33 = 0.05 cents or S$0.0005. It’s not very big and if things go wrong, the package acquisition will be dilutive.

We’ll wait and see what rents the development properties really command when they are completed.

This is why it’s important to dig into the announcements to see what really happens in acquisitions. This is especially so for multi-property deals.

Generally, information on acquisitions are usually found in the “Announcement” section under investor relations heading. The documents are usually lengthy and technical because the information contained is required by SGX.

 

Conclusion

So there you have it, the whole lot of considerations that I hope is helpful before you invest in a REIT.

Let us know in the comments box if you have specific questions

 

In the next edition, the following considerations will be added on. Look out for them!

Who are the tenants

Distribution waivers

RNAV or DCF valuation

Unencumbered assets

Income support lines in the financial statement

Myth: payment of management fees in units vs cash

Remuneration structure

Credit ratings

NPI margin

 


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