Since debuting in the Singapore market in 2002, real estate investment trusts (REITs) have grown to become one of the most popular investment vehicles. Besides providing investors with an opportunity to invest in a wide range of real estate at a low minimum capital outlay, REITs also deliver consistent distributions.
That said, not all REITs perform equally. One factor that may differentiate a market-beating REIT from the rest is a low debt-to-asset ratio.
Mathematically, the debt-to-asset ratio is calculated by dividing the REIT’s total debt by its assets. The lower the debt-to-asset ratio, the greater the financial flexibility to make debt-funded acquisitions for growth.
With this in mind, I did a simple screen to find the REITs I believe have the greatest financial flexibility for debt-funded acquisitional growth in the future.
REIT No. 1
First on the list is Fortune Real Estate Investment Trust (SGX: F25U) with a debt-to-asset ratio of just 20.9%. At this gearing level, Fortune REIT has a debt headroom of HK$18.7 billion before reaching the 45% regulator cap. It also has no refinancing needs until 2020 and a low effective cost of borrowing of 2.89%.
In 2018, despite selling a major asset in its portfolio, Fortune REIT’s revenue still increased by 0.2%, and distribution per unit grew 1.0%.
Just as important as financial flexibility is Fortune REIT’s likelihood for organic growth in 2019. In 2018, the REIT secured rental reversion rates of 12.7%, which should boost rental income in existing properties in 2019 and 2020.
At the time of writing, Fortune REIT units trade at HK$10.32 each. This translates to a price-to-book ratio of 0.61 and a trailing distribution yield of 5.01%.
REIT No. 2
SPH REIT (SGX: SK6U) comes in second with a gearing of 26.3% as of its first quarter ended November 2018. At that gearing level, SPH REIT had a debt headroom of approximately S$637.1 million before it hit the 45% regulatory limit.
However, it is worth noting that SPH REIT has taken on some debt to acquire Figtree Grove Shopping Centre in December. As such, the REIT, which now owns four properties including Paragon, The Clementi Mall, and The Rail Mall, said its gearing ratio has stretched to around 30%. However, a gearing ratio of 30% is still relatively low and allows it plenty of room to take on more debt should an opportunity unfold.
Currently, shares of SPH REIT exchange hands at S$1.06, giving it a price-to-book ratio of 1.12 and a distribution yield of 5.23%.
REIT No. 3
Frasers Commercial Trust (SGX: ND8U) completes the list with a gearing of 28.4%. The low debt affords Frasers Commercial Trust S$356.7 million in debt headroom before hitting the 45% regulatory limit. Besides its low debt levels, Frasers Commercial Trust also has 90% of its borrowings on fixed cost and no major refinancing needs until 2020.
The trust, which owns six properties, has negotiated built-in step-up rents at 47% of its leases. This should provide the trust with organic rental income growth. In addition, the asset enhancement initiative at one of its properties, Alexandra Technopark, is nearing full completion this year.
As of the time of writing, units of Frasers Commercial Trust trade at S$1.47 per piece. This translates to a price-to-book ratio of 0.93 and a distribution yield of 6.53%.
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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 owns units in Fortune Real Estate Investment Trust.