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Investors Take Note: These 2 Billion Dollar REITs Are Trading Near Their 52-Week Lows

One of the more popular types of investments in Singapore is the real estate investment trust.

Due to the structure of REITs, they are required to pay out most of their taxable income to their unitholders; this results in them offering high distribution yields for investors. Moreover, since we’re currently in a low interest rate environment, REITs, with their high yields, would seem like an attractive avenue for investors to earn income.

But, not every REIT would be a good investment. And with around 42 REITs and stapled trusts (trusts that consist of a REIT and a business trust) in our local stock market, it’s important that investors attempt to separate the wheat from the chaff. So, where should we start in our hunt for potential investing opportunities amongst REITs?

In my case, I would start by looking at REITs that are trading at prices close to a 52-week low. From such a list, I would then carry on further research to understand each REIT’s property profile, financials, management-calibre, and future prospects.

Let’s take a closer look at two REITs that currently have unit prices that are near their respective 52-week lows: CapitaLand Commercial Trust (SGX: C61U) and Parkway Life REIT (SGX: C2PU).


Source: SGX Stock Facts

CapitaLand Commercial Trust is a REIT with ownership (either full or partial) over 10 commercial properties in Singapore and one in Germany. The properties in Singapore include Capital Tower, Six Battery Road, Bugis Village, Raffles City, and One George Street.

The REIT’s latest earnings update, released in April, was for the first quarter of 2018, and the , quarter was a mixed one for CapitaLand Commercial Trust. It experienced a 7.7% year-on-year increase in revenue to S$96.4 million, and a 10.5% jump in net property income to S$77.2 million. But, its distribution per unit (DPU) fell by 11.7% to 2.12 cents.

Higher income from CapitaGreen, Capital Tower, and Six Battery Road, as well as a full quarter’s worth of contributions from Asia Square Tower 2, more than offset the loss of income from the sale of One George Street (a 50% interest), Golden Shoe Car Park, and Wilkie Edge. These led to CapitaLand Commercial Trust’s revenue and net property income growth.

A higher unit count due to a rights issue in October, and the conversion of certain convertible bonds in 2017, were the main culprits that led to the lower DPU. In fact, CapitaLand Commercial Trust’s distributable income grew by 7.5% year-on-year to S$76.6 million.

Earlier this week, CapitaLand Commercial Trust completed the acquisition of its aforementioned German property. The purchase marks the REIT’s first property investment outside of Singapore. The property in question is a 38-storey Grade A commercial building with ancillary retail space, and a four-storey heritage building for office use. CapitaLand Commercial Trust bought a 94.9% interest in the building for a sum of €356.0 million, which is a slight discount to the building’s independently appraised value of €360.9 million.

CapitaLand Commercial Trust’s expansion into Europe would help to diversify its income geographically. Unfortunately, the acquisition also raised the REIT’s leverage up to 39% from 37.9%. For context, REITs in Singapore have a leverage limit of up to 45%.

Next up, there’s Parkway Life REIT, which invests in healthcare-related assets in Asia. The REIT’s portfolio includes three private hospital properties in Singapore, 46 healthcare-related assets in Japan, and strata-titled units/lots in Gleneagles Intan Medical Centre in Malaysia.

In late April, Parkway Life REIT reported its 2018 first quarter earnings update. It was also a mixed quarter for the REIT. Gross revenue grew 3.2% year-on-year to S$27.8 million while net property income (NPI) similarly increased by 3.3% to S$26.0 million. But, its distribution per unit (DPU) declined by 3.4% to 3.17 cents compared to a year ago.  The good news here is that there was a one-off divestment gain in the first quarter of 2017; if the gain was excluded, Parkway Life REIT’s DPU would have increased by 3.6% year-on-year instead.

It its earnings update, Parkway Life REIT had shared the following useful comments on its outlook:

“The long-term outlook of the industry continues to be driven by favourable patient demographics and demand for better quality healthcare and aged care services.

Parkway Life REIT’s enlarged portfolio of 50 high-quality healthcare and healthcare-related assets places it in a good position to benefit from the resilient growth of the healthcare industry in the Asia Pacific region. Also, the entire portfolio is supported by favourable rental lease structures, where at least 95% of its Singapore and Japan portfolios have downside revenue protection and 61% of the total portfolio is pegged to CPI-linked revision formulae, ensuring steady future rental growth whilst protecting revenue stability amid uncertain market conditions.

In addition, Parkway Life REIT adopts prudent financial risk management to manage the exposure to interest rate risk and foreign currency risk. Interest rate risk is managed on an ongoing basis by largely hedging long-term committed borrowings using interest rate hedging financial instruments or issuance of fixed rate notes. This strengthens Parkway Life REIT’s resiliency against potential interest rate hikes. Foreign currency risk is managed by adopting a natural hedge strategy for the Japanese investments to maintain a stable net asset value and putting in place Japanese Yen forward contracts to shield against JPY currency volatility.”

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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 Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommendations on CapitaLand Commercial Trust and Parkway Life REIT.