What are REITs? They are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Individuals such as you and me can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend per unit (DPU). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses, ships, retail spaces and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. With current market being so depressed, good REITs have fallen to a point where their unit price are significantly below their NAV, of course the word "good" is subjective to ones' own research and opinion on this security. So, the question is how to identify good REITs to invest in? The ideal would be to buy into a good track record REIT that offers sustainable high yields, prudently managed capital/assets, low gearing, ability to easily obtaining capital for refinancing, strong reputation and backing by a well known group and trading at a huge discount (40-50%) below its NAV. With that mouth full, let’s start with a 8 simply steps on what to look out for and what to think about with when investing in REITs listed in our local exchange. Step1: Knowing the REITs -Which country/ries does the REITs have assets in? For example, Asscott REITs have about 50% of its assets in developed countries like Japan/Singapore and the other 50% in developing countries like Vietnam. -What are some of the good qualities stated in their website? Information like, the FIRST REITs established in Singapore, the BIGGEST REITs in South East Asia, 10 YEARS of diligent distribution of dividends etc... List them down here. -What caught your attention at first? This sub-step is basically for you to written down, what caught you attention, that invoked you to spent your previous time researching this REIT instead of the other hundred over different REITs listed in Singapore. Like for example, Saizen REITs caught my attention because 1) Its high yields 2) Share price have dropped way below NAV per share 3) Exposure to Japanese residential market etc Step2: Study the C & I in more detail C refers to countries and I refers to the industries. Basically, this step is for you to research a bit more in detail about the countries and industries that your REITs assets are allocated at. Do touch a bit on the following such as The country's status: -Population figure and growth -Demand and Supply figures For example, in Singapore Office rental spaces are forecasted to increase in supply , but the demand is to drop etc, drop by how much? -Employment levels are they drastically falling? -Governments policies on REITs (if any): Any help available for them? Like allowing them to reduce their minimal distribution to 50% etc -What type of industry is this REITs involved in? Properties/Officers/Retail/Malls/Shipping/Residential/Hospital and healthcare Some REITs have a combination mixture of both industries, say for example Sun Tech REITs rent out both retail malls and offices spaces. -Industrial Cycle: Look at charts in that particular country and industry, estimate, basically how long the cycle whether properties/shipping etc took to bottom out (Indonesia's longest downtrend for properties is 16mths), my best guess is that now , or perhaps most of the cycle charts are at their over sold level or have fallen from a great high since 2007. Get to know the industry itself more, which industry is more resilient, why is it that Hospital and medical industries is more resilient to say as compared to shipping industries? Of course, according to value investing principals, "Invest when fear is the greatest" The best time to invest in these REITs is when there is server downturn or a recession such as now, this then results in very low REITs unit price, higher yields and the downside is some what limited. But one has to be at least aware where the REITs allocation is at, you don't want a REITs that allocates its assets in countries like Iceland (renting out igloos) or North Korea (renting out military faculties for nuclear war-heads) etc Step3: Past Performances -How old is this REITs According to some industrial experts, it is best to invest in REITs that have at least 3 years of consistent good history. This is because (I think), the longer the REITs have been in profitable operation, the more likely its business model, asset allocation , capital management, refinancing matters are more or less taken care of. -Data collection table Create a table, that shows the REIT's revenue/operational cash flow/operational margins since listing. In this way you'll probably get a clearer picture as to whether the REITs you are looking at, is or has been doing well these past few years. Basically I avoid REITs that have a very inconsistent history of revenue/operational cash flow and margins, these is because, for the last 3-5 years if you cannot show me consistent increasing results, what makes you think you can do so for the coming tough years, that this particularly drastic crisis have caused? Step4: Knowing the Management -Who is managing the trust -What policies are established into the REITs? Policies like deferred units establishments (Dilutes your yields in the future), management payment via units(Ensures management work hard to increase the Share price of the unit) etc Establishing good relationships with tenants for example, passing government benefits, yearly free estate fixtures. All these can be found in the REIT's quarterly presentations and pass news. -Any strong backing/pipelines? Like Keppel REIT is backed by parent company Keppel Corp and Capitalmalltrust/CCT backed by Capitaland. I believe backing is important, this is because say Capitalmalltrust were to ever be short on cash, I’m confident the parent company CapitaLand will pump in money from its $7billion or so cash reserves. This backing provides investors an extra safety net to ease our worries. -Are they confident in the business? Look out for significant holdings by Directors/CEO and insider buying, these information should be easily obtain either via the RIET's website or go to SGX.com or simply call the investment relationship manager. -What are the managers doing about any short/long term problems? Like what are they doing to conserve cash (Converting short term loans to long ones?) What plans are taken to reduce debt? What meetings, conferences, negotiations, measurements are going to settle matters like refinancing Step5: Health of the REIT's finances Years/Acc 2005 ~2006~ 2007~ 2008 Receivables 2,762 ~12,987 ~10,246 ~27,749 ~(PASS) DER ratio 0.240 ~0.230 ~0.210 ~0.350~(PASS) Shareholdings 0.890b~ 1.201b ~1.321b ~1.361b~(PASS) NAV per share $1.62 ~$1.85 ~$2.69 ~$2.94 ~(PASS) Here we look at accounts like receivables, finding out whether they are increasing drastically as compared to the pervious years? If so, then ask yourself, why is this so? Am ever increasing receivable would mean a higher chance of bad debts occurring. Means that clients or tenants are not paying up! Just like Peter Parker (Spiderman)...despite his heroism, he is always late paying his rent, causing a lot of anger to his landlord. You don’t want too many of him in staying in the properties of your REITs because parkers are really fuckers to your dividends. Next will be Debt to Equity Ratio. If the ratio shows 1.5 times in any of those years, one have to be alert. Because the higher the REITs debts, the more interest it needs to pay, the chances of going bankrupt (if loan is not refinanced) is high. A healthy REIT is one that takes up 50% less its market capital. And lastly the most important measure, the NAV value. Especially for REITs, the higher the NAV, the better it is for investors and for the company to refinance its loans via collaterals. In fact, the intrinsic value should also be based on the NAV of the REITs, however in times like this, prices of REITs per unit have fallen way below its NAV, so a good buy would be a price that is about 40-50% to its NAV. Also take note of falling property values, because the more the prices fall, the more jittery banks become, the faster they want their loans back. Likewise borrowing will also be hard for REITs if its properties are falling in value. Step6: Their investment portfolio Only four simple questions to be answered here 1) Are their portfolios well diversified? 2) What are some good points they mentioned about their properties? Award winning, most traffic alluring buildings, 3) What are their current plans or future plans? 4) Have you seen their portfolio in action?* (subjected to certain REITs only) What I mean in question 3 is that, for etc, CapitalMallTrust (CMT) has its investment income generating properties like IMM/ Tampinies mall, seeing them in action simply means just going down to these malls, take a look at the crowd, the influx of people, the general feel of the place. Because more crowds means more business, more business means more sustainable occupancy level means more stable dividends. Speaking of sustainability, that brings us to our next step Step7: Sustainability of the yield Step7 is basically putting all the data relating or influencing the sustainability of the yields in a table. So you have a better view of what's falling or rising Years/Acc ~2006~2007~2008 Rent rates ~$7.00~$8.73~$8.00 ~(PASS) Rate ~99%~98%~99% ~(PASS) Investing FCF ~(151k)~(842k)~(39k)~(PASS) Revenue ~1.67m~1.88m~2.55m~(PASS) Interest Rate ~3.3%~3.4%~3.9%~(PASS) Shareholdings ~0.890b~ 1.201b ~1.321b ~1.361b~(PASS) Here we again look at the historical data of the rent rates/occupancy rates/investing cash flow etc. With regards to rent rates, its best to invest in REITs that have been charging low rental rates with its clients in the pass years, in that way there is buffer for both down and up side. What I mean here is, take CapitalCommTrust for example; they charge an average of $7.14 per sq foot to their office tenants, while the market average is a high of $11.40. So, if this downtrend were to drag this office rental space to $7.40 according to some property valuator expert, if this happens, CCT will be able to more or less maintain this $7.14 per sq foot regardless, likewise there is an potential upside if the market were to raise back to $11.40 giving CCT the ability to chare more in the future. Next we look at occupancy rate and interest rates, in which both variables are likely to increase in the coming months or years; investors will have to taken note and expect a lower DPU. Ensure also, that investing FCF, if there’s huge spending from the last year (the REIT bought another building or ship or space), the next year should or must yield back a higher revenue figure. Lastly we come to our finally step, Step8: Summary This finally part, involves listing down the latest NAV per share, your intrinsic value via Gordon's dividend discount model with realistic assumptions http://www.answers.com/topic/gordon-model The current share price, risks involved, margin of safety etc. It would look something like this NAV per share as of Dec 2008: $1.55 per share Intrinsic Value: $1.40 per share for the next 10 years using 5% discount rate Current Share price: $0.77 Risks involved: Possible deflation, Assets not that diversified, $600m to be refinanced in dec 2009 Margin of safety: (I’ll use NAV in this case) about 40%-50% Yet, despite doing so much (subjective) research on particular REITs in mind, there will always be risks in any investment, and these risks are sort of heightening in these current market. Some risks to take note of, socially for REITs is 1) Deflation. If you noticed, under most REIT's balance sheet their long term assets socially the account like their buildings/ships/estates has been inflated through out these many years. What I mean by inflated is for example, CMT (Capitalmalltrust) bought IMM for 1.6billion in 2001. So in 2002, the value of IMM rose to 1.8billion, in 2003 rose to 2.2billion , in 2004 rose to 2.6billion and so on, so you can see, these properties are inflated in their holding value by a property value. So, if their value can raise so fast, isn’t it possible to even drop that much? That has yet to be seen in this current market, and if drastic devaluation takes place, problems like Loan to value will take place, banks start to panic and ask for more compensation or return them their loans, refinancing will thus take place. 2) Ability to refinance, due to credit crisis now, REITs faces a drying pool of credit. What happens if a REIT is not able to get refinanced? Then bankruptcy will occur, possible unfortunate events like fire sale of their assets might be possible, that why the importance of buying way below their NAV per share gives you that margin of safety from this unfortunate event. In addition, but looking into track records, past performance, strong balance sheet, reputation, consistency in DUP payouts, who are the shareholders etc will more or less screen out those good REITs that can easily get refinanced. Hopefully this simple guide will be useful to investors looking to invest in Singapore REITs which have fallen to such a level deemed very attractive to me.
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