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 40 REITs and stapled trusts (trusts that consist of a REIT and a business trust) in…
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 40 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 three REITs that currently have unit prices that are near their respective 52-week lows: Ascendas Real Estate Investment Trust (SGX: A17U), Frasers Centrepoint Trust (SGX: J69U), and Parkway Life REIT (SGX: C2PU).
Source: SGX Stock Facts
Ascendas REIT has a portfolio of 145 properties across Singapore, Australia, and the United Kingdom. These properties are mostly used for industrial and logistical purposes.
In late October, Ascendas REIT reported its earnings update for the second quarter of its financial year ending 31 March 2019 (FY2019). The reporting period was from 1 July 2018 to 30 September 2018. During the reporting quarter, Ascendas REIT’s gross revenue grew by 1.1% year-on-year to S$218.1 million because of new property acquisitions in Australia and the UK. Despite the higher gross revenue, the REIT’s net property income fell by 1.0% to S$158.9 million, which led to a 4.2% decline in distribution per unit (DPU) to 3.887 cents. Ascendas REIT’s issuance of 178 million new units for S$2.54 each on 18 September 2018 for a private placement also played a role in the lower DPU.
As of 30 September 2018, Ascendas REIT’s gearing stood at 33.2%, which is a healthy distance from the regulatory gearing ceiling of 45%. Meanwhile, the REIT’s committed occupancy rate stood at 90.6%, down from 92.0% a year ago.
Singapore is Ascendas REIT’s most important market, as it accounted for 82% of the total value of the REIT’s property portfolio at the end of the reporting quarter. In its latest earnings update, Ascendas REIT shared some useful comments on the state of Singapore’s economy and industrial property market:
“In 3Q 2018, the Singapore economy expanded by 2.6% year-on-year (y-o-y), moderating from the 4.1% growth in 2Q 2018. Growth in the manufacturing sector slowed to 4.5% y-o-y (2Q 2018: 10.6%) whilst the services producing industries maintained a 2.9% y-o-y growth (1Q
2018: 2.9%). The Monetary Authority of Singapore expects the Singapore economy to expand within the upper half of the 2.5% to 3.5% forecast in 2018 (2017: 3.6%).
On the back of healthy macro-economic data and the tapering off of new industrial property supply, there are market expectations of a gradual recovery of the industrial property market. However, businesses remain cautious amid uncertainties arising from the trade tensions and continue to review their business space commitments.”
Investors may want to note that Ascendas REIT has a long term strategy to build up its portfolio in Australia, the UK, and also Europe.
Next up, I have Frasers Centrepoint Trust, a REIT which owns six suburban retail malls in Singapore including Causeway Point, Northpoint City North Wing (including the Yishun 10 Retail Podium), and Changi City Point.
The REIT’s latest earnings update – for the fourth quarter and the whole of its financial year ended 30 September 2018 (FY2018) – was also released in late October. During the reporting quarter, Frasers Centrepoint Trust’s gross revenue inched up by 0.5% year-on-year to S$48.5 million. But, its net property income fell by 4.9% to S$32.9 million because of a 14.4% jump in property expenses to S$15.6 million that was partly due to ad-hoc repair and replacement works carried out in the current quarter. As a result, the REIT’s DPU fell by 3.6% from a year ago to 2.862 cents.
Frasers Centrepoint Trust ended the reporting quarter with a very healthy gearing level of 28.6%, and a respectable committed occupancy rate of 94.7%.
The following are useful and succinct comments that Frasers Centrepoint Trust shared about its outlook in its latest earnings update:
“Excluding motor vehicles, retail sales index increased 2.4% year-on-year in August 2018. We expect the performance of our suburban malls to remain stable. Northpoint City North Wing, having stabilised following the completion of its asset enhancement exercise, has helped raised earnings.”
Last but not least, there is Parkway Life REIT, one of the largest listed healthcare REITs in Asia. Parkway Life REIT has ownership over three private hospital properties locally and hold stakes in 46 healthcare-related assets in Japan. It also has strata-titled units/lots in Gleneagles Intan Medical Centre in Malaysia.
In 2018’s third quarter, Parkway Life REIT’s gross revenue grew by 2.5% from a year ago to S$28.4 million, while its net property income increased at the same pace of 2.5% to S$26.5 million. The higher gross revenue and net property income were due to contributions from one nursing rehabilitation facility acquired in February 2018, and higher rent from the REIT’s Singapore hospitals. Despite the top line growth, Parkway Life REIT’s DPU fell by 4.1% from a year ago to 3.23 cents. Thing is, Parkway Life REIT sold four properties in Japan in December 2016 and it distributed its divestment gains over the four quarters of 2017. If the one-off divestment gain distribution was adjusted for, Parkway Life REIT’s DPU in 2018’s third quarter would have grown by 2.7% year-on-year.
The REIT ended the latest reporting quarter with a gearing ratio of 37.7%, which is a little close to the regulatory gearing limit. Its committed occupancy rate remains healthy at 100%.
Here are useful comments Parkway Life REIT shared about its outlook in its latest earnings update:
“The long-term outlook of the industry continues to be driven by aging population and demand for better quality healthcare and aged care services. Notwithstanding that, Parkway Life REIT remains cautious and vigilant given the current uncertainties in the macro economy and volatility in the financial market.
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 portfolio is largely supported by favourable rental lease structures, where at least 95% of its Singapore and Japan portfolios have downside revenue protection and 62% of the total portfolio is pegged to CPI-linked revision formula, ensuring steady 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 resilience 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 Japanese Yen 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 for Frasers Centrepoint Trust and Parkway Life REIT.