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3 Things You Should Look at When Analysing REITs

Singapore’s stock market is well-known for the presence of high-yielding real estate investment trusts. In fact, the REITs in Singapore offer one of the highest distribution yields in the Asia Pacific region.

But, just because the REITs here offer high yields does not make them good investments automatically. What should we look out for when we are analysing REITs? Here are three important things you may want to consider.

1. Leverage

A REIT must distribute 90% of its distributable income to its unitholders. This means that it may not have much cash-buffer to tide over any sudden downturns in its business environment.

At the same time, a REIT in Singapore can have a leverage ratio of no more than 45% according to current regulations. So, a REIT could face liquidity issues if and when its leverage ratio is near the 45% ceiling during a period when its business is in the doldrums. In such an instance, the REIT may need to raise new equity to improve its balance sheet – this could dilute the stakes of its existing unitholders.

As examples of REITs in Singapore’s market with high and low leverage ratios, we can look at Sabana Shariah Compliant REIT (SGX: M1GU) and Frasers Centrepoint Trust (SGX: J69U). The former has a leverage ratio of close to 42% while the latter has a more conservative ratio of 28%.

2. Cash Flow

Although a REIT distributes 90% of its distributable income, its distributable income is not the same as its cash flow. As distributions are ultimately paid out in cash, we need to ensure that a REIT’s cash flow is sufficient to sustain its distributions going forward.

3. Acquisitions

Lastly, we need to look at the acquisition history of a REIT. Generally speaking, REITs grow by acquiring properties. However, given that they have no large cash buffer for acquisitions (as alluded to earlier), they have to raise equity and/or debt to purchase properties.

We would have to see how a REIT has handled its acquisitions in the past and whether its distributions have managed to grow on a per unit basis. If a REIT’s acquisitions have not resulted in growth in its distribution per unit (DPU), it could be an indication that the REIT’s manager is not being fair to unitholders.

A recent example of an accretive acquisition can be seen in Ascendas Real Estate Investment Trust (SGX: A17U). The industrial REIT had made two acquisitions in Australia (one business park in Sydney and a logistics property in Melbourne) in late 2016. According to the REIT manager’s number-crunching, the two properties would hypothetically increase Ascendas REIT’s DPU in the fiscal year ended 31 March 2016 by 0.017 cents if they had been acquired on 1 April 2015.

Foolish Summary

REITs are investment vehicles backed by physical assets that generate recurring income. As such, REITs can be useful income-generators for investors. But, there are risks associated with REITs. It is important for investors to know what to look out for before investing in one.

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