With more than 40 REITs and stapled trusts in Singapore, finding one that I want to buy and hold forever is no easy task. To qualify for my portfolio, the REIT must demonstrate: (1) an established track record; (2) a resilient and diverse portfolio of properties; (3) prudent debt management; (4) properties with the propensity to appreciate in value; and (5) sound capital recycling strategies. The strict criteria will inevitably exclude most REITs in Singapore.
However, despite my strict requirements, I believe I have found two REITs that fit the bill.
Fortune Real Estate Investment Trust (SGX:F25U) is the first one. This REIT invests primarily in sub-urban shopping malls in Hong Kong. It has its main listing in Hong Kong, with a secondary listing in the Singapore stock market.
The REIT currently has a line-up of 16 retail malls and properties located across Hong Kong. These include Metropolis in Kowloon and Caribbean Square on Lantau Island, among others.
Fortune REIT has, perhaps, one of the best track records of distribution per unit growth among REITs in Singapore. Since its listing, Fortune REIT has managed to grow its distribution per unit (DPU) by a compounded annual rate of 3.04%, from 33.4 Hong Kong cents in 2004 to 50.78 Hong Kong cents in 2017.
Besides its consistent distribution growth, the property portfolio of Fortune REIT has also been consistently appreciating. Most of its properties have appreciated substantially since it was acquired. Even as recently as 2017, Fortune REIT managed to report a valuation gain of HK$2,437 million, or a 6.7% gain, from a year ago.
In addition, the trust has one of the lowest debt-to-asset ratios among REITs in Singapore of just 27.4%. This gives it another HK$12.7 billion in debt headroom before it reaches the 45% regulatory limit. This low debt level affords the REIT financial muscle to fund further acquisitions in the future.
Moreover, the management behind the REIT has consistently made sound capital recycling decisions. This is demonstrated by prudent acquisition strategy and the disposal of underperforming assets at good prices to unlock value to unitholders. The management has also initiated a number of asset enhancement projects over the years that have been highly successful with return on investment in excess of 25% on every project.
At the time of writing, Fortune REIT trades at HK$9.40 per unit. This translates to price-to-book ratio of 0.66 and an attractive trailing distribution yield of 5.43%. This is a decent price to pay for a REIT with such a reputable track record.
The second REIT on the list is Ascendas Real Estate Investment Trust (SGX: A17U), the largest industrial REIT listed in Singapore. The trust has a portfolio line up of 99 properties in Singapore and 31 in Australia.
The REIT has a diverse portfolio, which includes a range of different property types such as logistics centres, data centres and science parks, among others.
Since its listing, Ascendas REIT has an enviable record of growing its distribution per unit by a compounded annual rate of 5.2%, from 7.63 Singapore cents in FY02/03 to 15.74 Singapore cents in FY16/17.
Like Fortune REIT, the management has a stellar record of strategic capital recycling initiatives that have contributed to the consistent net asset value and DPU growth of the REIT.
Moreover, Ascendas REIT has managed to maintain a relatively low gearing ratio of 34.4%, which gives in headroom to fund further acquisitions down the road. With the management’s stellar track record of capital allocation, unitholders can be confident that the additional debt headroom would be put to good use in the future.
Furthermore, despite the recent challenges facing the local property market, Ascendas REIT still managed to put in a strong showing over the last 12-month period, securing rental renewal rates at 3.1% above the previous leases, which will provide additional rental income for the next few years. The positive rental renewals show the resilience of its properties and the ability to attract tenants even in harsh economic conditions.
Currently, units of Ascendas REIT trade at S$2.65 per piece, which is a 20% premium to book value and a distribution yield of 5.99%. This is by no means cheap. However, despite trading above its book value, I do believe that even at current prices, Ascendas REIT can continue to deliver sustainable and consistent returns to unitholders for many years to come.
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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 contributor Jeremy Chia does not own shares in any companies mentioned.