When investing in Real Estate Investment Trusts (REITs), we need to know whether the REIT has the financial muscle to reward unitholders through acquisitions. One of the key metrics I use to gauge a REIT’s propensity for yield growth is its gearing ratio.
The gearing ratio tells us how much debt the REIT has in relation to its assets. The lower the debt load, the more leeway the REIT has to take on more debt to make acquisitions.
With that in mind, here are three Singapore-listed REITs with the lowest gearing ratios.
No. 1: Fortune Real Estate Investment Trust
Topping this list is Hong Kong Suburban retail REIT Fortune Real Estate Investment Trust (SGX: F25U). As of 31 December 2018, the REIT had a gearing ratio of 20.9%. This gives it a debt headroom of HK$18.7 billion before it reaches the 45% regulatory limit. In 2018, the REIT had a rental reversion rate of 12.7%, which should also provide organic rental income boost.
It also has a low effective borrowing cost at 2.89%. Coupled with its low gearing, Fortune REIT is well-positioned to make yield-enhancing acquisitions in the future.
No. 2: Frasers Centrepoint Trust
Second on this list is local suburban mall REIT Frasers Centrepoint Trust (SGX: J69U) with a gearing ratio of 28.8%.
The REIT has a remarkable track record of growing its distribution per unit (DPU) in the past. In the six months ended 31 March 2019, Frasers Centrepoint Trust managed a 3.6% increase in net property income, while DPU rose 0.9%.
As with Fortune REIT, Frasers Centrepoint Trust has a low cost of borrowing at just 2.8% and an interest cover of six times, which makes it a good candidate to make debt-funded acquisitions in the future.
No. 3: Frasers Commercial Trust
Frasers Commercial Trust (SGX: ND8U) has a gearing ratio of 29.1%. It owns six commercial properties. However, the trust suffered lower net property income for the quarter ended 31 March due to a weaker Australian dollar and lower occupancy at Alexandra Technopark, which is undergoing refurbishments.
Nevertheless, its low gearing and relatively low average borrowing rate of 2.98% position it well to make acquisitions in the future.
No. 4: Sasseur Real Estate Investment Trust
China Outlet mall owner Sasseur Real Estate Investment Trust (SGX: CRPU) comes in just marginally behind with a gearing ratio of 29.2%. The REIT beat its IPO forecast for the first 12 months as a listed entity.
Its DPU looks likely to grow as two of its malls are still in the high-growth phase and are still attracting greater footfall.
As its rental income is tied to tenant sales, higher tenant sales will have a direct impact on DPU. The REIT flexed its financial muscle earlier this year when it announced its first acquisition as a public entity.
No. 5: SPH REIT
Completing the list is SPH REIT (SGX: SK6U). The REIT has a gearing of 30.1% and an average cost of debt at 2.89%. It acquired Figtree Grove Shopping Centre on December 2018, which contributed to a 1.5% increase in DPU in the quarter ended 31 May 2019.
Moreover, it reported an 8.4% positive rental reversion rate in the most recent reporting quarter.
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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 writer Jeremy Chia owns units in Sasseur Real Estate Investment Trust and Fortune Real Estate Investment Trust. Motley Fool Singapore has a recommendation for Frasers Centrepoint Trust.