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4 Ways to Make Sense of a REIT’s Earnings

Real estate investment trusts (REITs) are easy to understand on the surface: a bunch of properties are lumped together as a portfolio and managed by a REIT manager. A value is attached to the properties, which then translates into a market price per share, which is traded on an exchange. However, the details of each REIT are more nuanced than that. If you’re looking to invest in REITs, you need to understand which numbers are most important when assessing a REIT’s performance.

This is where a simple understanding of key metrics can make a difference in your portfolio’s performance. By identifying a few key areas of strength and weakness in REITs, investors will be able to decide if they should commit more capital, or withdraw it. Below are four effective ways to analyse a REIT’s performance, along with examples.

1. Distribution per unit (DPU)

A REIT’s DPU represents the dividend payments you would receive as an investor. Yields are one of the main reasons REITs exist, as their purpose is to provide a stable and predictable income stream for their unitholders. Investors should look at whether a REIT’s DPU has increased or decreased (on a year-on-year basis) as well as the reasons for the change. Some one-off adjustments may push up or depress the DPU, and investors should adjust for these.

For example, Frasers Centrepoint Trust (SGX: J69U) reported a 1.7% year-on-year decrease in DPU to 3.0 Singapore cents in its Q3 2019 earnings report. This was due to higher overall portfolio occupancy, offset by higher property expenses due to the absence of a property tax refund as well as an enlarged unit base due to the REIT’s recent private placement.

2. Occupancy rate

The occupancy rate for properties within a REIT’s portfolio points to the demand for leasing, and this is also tied to the type of property involved (i.e., commercial, industrial, or retail) and the country where the properties are located. Obviously, we generally want to see a higher occupancy rate as it shows the properties are fully leased out and generating rental income for the REIT.

Mapletree Industrial Trust‘s (SGX: ME8U) Q1 FY 2019/2020 presentation shows that occupancy rates have increased from 89.8% to 90.8% due to the improved occupancy of the hi-tech building segment, and it’s a good sign that industrial property demand remains stable despite the oversupply situation for industrial property in Singapore.

3. Rental reversion

Rental reversion is a term used to indicate the upward or downward revisions in rent agreements signed in the latest quarter versus the overall average rental rate for the portfolio. A positive reversion means new rents committed are higher than rents signed under older lease agreements, which is beneficial for the REIT as it signifies higher leasing revenue. Negative reversions may sometimes occur when there is an oversupply of property, thereby putting pressure on landlords to reduce rental rates to attract tenants.

CapitaLand Mall Trust (SGX: C38U) reported a positive rental reversion of 1.8% in its Q2 2019 earnings release.

4. Gearing level

The gearing level of a REIT is computed using gross borrowings (i.e., debt and loans) as a percentage of total assets. The statutory gearing limit for REITs is 45% as mandated by law, and most REITs will try not to exceed the 40% threshold in order to provide themselves with some leeway in case they need to gear up a little more.

Frasers Commercial Trust (SGX: ND8U) has a gearing level of 29.3% as reported in its Q3 2019 earnings. This level is way below the statutory limit and provides the REIT with adequate debt headroom to borrow more in order to carry out accretive mergers and acquisitions.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of Fraser Centrepoint Trust, Mapletree Industrial Trust, and CapitaLand Mall Trust.