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What’s Happening with REITs

Singapore skyline daytime - CopyAs March draws to a close, Real Estate Investment Trust (REIT) investors will have quite a bit to mull over, starting with the scrutiny of REITs by ratings agencies such as Fitch Ratings and Standard & Poor’s.

Elsewhere, newspaper publisher and property developer Singapore Press Holdings (SGX: T39) announced that it was contemplating spinning off some of its properties into a REIT earlier in March. The news excited the shares to a multi-year high of $4.33.

Property developer Overseas Union Enterprise (SGX: LJ3) reported that it was considering establishing a REIT too. That pushed OUE’s share price to a high of $3.12 before settling at around $3.00 a pop.

It seems that everyone wants to cash in on the REITs’ action. Thing is REITs had a good run starting from 2012, with a near 40% increase in the FTSE Straits Times Real Estate Investment Trust Index (SGX: FSTAS8670) that tracks the performance of various REITs in Singapore.

Elsewhere, healthcare-related First Real Estate Investment Trust (SGX: AW9U) has acquired two Indonesian hospitals for S$190m. The hospitals were acquired from the REIT’s sponsor, PT Lippo Karawaci Tbk, at a discount. Independent real-estate valuers reckoned the hospitals were worth around S$219m, which equates to a discount of about 13% on the purchase price.

The acquisition will be funded by a mixture of debt and shares issued to First REIT’s sponsor. Existing unit holders will see their stake diluted by around 7%, which might change depending on the issue price of the additional units.

First REIT, which is not rated by ratings agencies, will see its gearing ratio increase to an estimated 34.3% after the acquisitions. This is just below the allowable limit of 35% for an unrated REIT.

The table below shows the changes to the Distribution per Unit and Net Asset Value after the acquisition based on its latest available financial statements:

Before   Acquisition After   Acquisition
DPU** $0.0658 $0.0694
NAV $0.83 $0.90
**: DPU does not include the distribution   component arising from divestment gains

After the acquisition, investors could get a distribution yield of 5.7% based on First REIT’s current price of $1.22.

Whether REITs a right for you or not, The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.