As a REIT investor, I look out for REITs that can grow their distributions per unit (DPU) sustainably. Such growth is excellent for long-term income investors who can then reap the benefits from a bigger yield.
As such, I thought I would highlight three ways that REITs can improve their DPU, increasing unitholder value in the process.
Step-up rental contracts
REITs can increase their rental income by signing step-up lease agreements with tenants. These contracts stipulate that the rental rate will increase at pre-determined points in the future.
Step-up contracts are usually seen in commercial or industrial properties. This type of lease gives the REIT an opportunity for increased rental income in the future, without having to renegotiate a new contract with the tenant.
Increasing their gross floor area
REIT managers can also enhance the property yield by increasing the property’s gross floor area (GFA), thereby increasing the net lettable area. REIT managers achieve this by upgrading their assets through asset enhancement initiatives (AEI).
By increasing the net lettable area, REITs can increase the income generated by their assets.
Converting low yield space into higher yield space
Finally, a REIT can grow its rental income organically is by increasing the yield on its current lettable area. This can be done by improving their properties through AEI or by changing the tenant mix.
REITs can add value to tenants by enhancing their property through renovations and upgrading of their facility. Retail REITs, for instance, constantly upgrade their property to attract shoppers to their malls. This has the effect of increasing the value of their shopping space to their tenants and consequently, raise the rental rates for the REIT.
REITs can also bring in new tenants that can pay higher rents as compared to the previous tenants.
The Foolish takeaway
As REIT investors, looking out for REITs that employ these three strategies may be a good place to start. However, besides these growth strategies, there are other aspects of a REIT to consider, like its debt profile, property portfolio and reliability of management. We should inspect each of these elements before making a holistic investment decision.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.