📖 Making your millions in REITs by Gabriel Yap

Business model of REITs
The fundamental operation of a REIT is that the manager undertakes loans and issues new equity to buy assets, lease the assets and collect rental from the assets.

Total shareholder return
There are two components of total return for REIT shareholders: (a) a rising Distribution Per Unit (DPU) and (b) a rising REIT price where the former is a huge lynchpin for the latter. The ability to dish and grow the DPUs over time is an important indicator of the quality of the REITs.

REITs are mostly not structured for growth
A REIT enjoys tax transparency at the REIT level if it pays out at least 90% of its taxable income as distributable income to unit holders. This allows the shareholders control over free cash flow, earn steady and growing dividends and minimize re-investment risk. This would normally leave little cash buffer for REITs which may force the REIT manager to tap into debt and/or equity for huge acquisitions. This is not negative per se as it allows minority shareholders to constantly review a REIT’s acquisitions which effectively adds another layer of scrunity.

REITs that can consistently make DPU-accretive acquisitions and employ shareholder-friendly financing structures to finance such acquisitions will be winners in the REIT sector. Such REITs will help enhance total return to unitholders and increase the potential for future growth of the property portfolio through their astute acquisitions.

Buy well, buy low
The best time to buy is when the market punishes the REIT price, but the smart investor should know the REIT’s quality of assets well enough to decide whether prevailing market prices are presently undervaluing its quality assets.

Challenging times when REITs are stress tested and the best REITs are found

Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.
Andy Grove

Because REITs are leveraged, they are volatile and prone to fail during challenging times and crisises — devaluation of their assets, loss of income, interest rate risks and refinancing risks (there is a section on risks below). Investors are better off to select well-managed REITs who are more prudent and not too aggressive as we cannot predict precisely when a crisis will occur.

Only a few do well for shareholders
Only 5 out of 22 (excluding those that were privatized or merged since) have posted capital gains compared to their IPO prices. The great thing is that some of the gains posted by the five winners are really outsized gains like Mapletree Commercial Trust’s 119.32% and Keppel DC REIT’s 174.19%.

Almost all REITs with 100% or near-100% overseas assets suffered losses. The exceptions were Frasers Logistics & Commercial Trust and Elite Commercial REIT. And even the gains are fairly mixed.

Analysing REITs for outperformance

The better-performing REITs tend to show a disciplined and well-thought-through strategy in running their business which is shown clearly through the Profit & Loss statement and the financial strength and flexibility in its Balance Sheet.

Operating Profit & Loss Metrics

Net Property Income (NPI)
A REIT is as good as the kind of properties it owns. NPI measures the property-level profit on a standalone basis, excluding the REIT’s corporate overheads or its financing strategies.

A measure of the value and the fundamental attractiveness of its assets based on its earning power
A very good indicator of a property has been bought or sold on an expensive or cheap basis.
A good and reliable measure of a REIT’s operating efficiency

NPI is a good indicator of a REIT’s management track record. It is one good indicator that over time, better REIT management teams would be able to generate consistent above average same-store growth. Their ability to deliver same-store NPI growth will eventually be reflected in superior annual total returns to shareholders.

Investors should always be wary of REITs that expand and acquire rapidly while their existing assets suffer a decline in NPI. It begs the question if the managers had embarked on just acquisitions more so to help bridge the fall in NPI contribution from existing buildings as compared to the true merits of any new acquisition. Investors should always ascertain if the “same-store sales” continue to be strong on existing assets.

Net Property Income Yield (NPI Yield)
NPI Yield = Net Property Income/Property Value

The NPI Yield is an important way to measure the future income of a REIT’s property. Smart REIT investors should always calculate the NPI yield of properties, more so if they were bundled as a portfolio for acquisition.

Investors should always assess a REIT’s acquisition of new assets based on the likelihood of finding and retaining good assets with a strong stream of tenants, suitability, demand-supply dynamics, location and future government plans for the region where the property is located.

Be wary of REITs that announce acquisitions as a package of assets because the overall blended figure may actually overshadow some of the underlying key parameters like Net Income Yield, NPI growth and DPU accretion, etc. of each of the individual assets.

For the smart REIT investor, it is vital to assess each acquisition to see if indeed the various individual assets enhance DPU or whether the acquisitions are only accretive on an average blended basis which is normally what is highlighted in the REIT’s acquisition presentation announcement. This is to further understand if the higher-risk assets are packaged together with good acquisitions which will naturally boost NPI yield.

Interest Cover
Interest Cover = (Earnings Before Interest, Taxes, Depreciation and Amortization, EBITDA) / Total Interest Costs

It is a good measure when used together with the Gearing Ratio to encapsulate the financial position of a REIT as well as to measure how easily or difficult the REIT can repay its interest expense on outstanding debt.

All REITs thrive on financing, the cheaper the better. Naturally, therefore, the Interest Cover is a good indication to investors as to how far a REIT can gear up further and also indicates if a REIT is ramping up acquisitions too quickly. It also indicates to investors that when interest rates change suddenly, which are the REITs (obviously the highly-geared ones) that would be most vulnerable in terms of share price volatility.

REITs with good Interest Cover are a result of either lower gearing of the balance sheet, better-income generation ability of its property or better reputation of the sponsor that allowed the REIT to secure bank financing at lower interest rates.

While there is no clear optimal Interest Cover for a REIT, past performances have indicated that those with the strongest Interest Cover have done well and consistently outperformed the other REITs with lower Interest Cover.

Dividend Per Unit (DPU)
DPU = Total Dividend Payout / Number of Shares

The ability of S-REITs to deliver outperformance should not be based on growth in revenue or NPI or Distributable Income, but on the DPU.

An increase in gross revenue and NPI should always come with an increase in DPU. A jump in gross revenue and NPI without a corresponding increase in DPU could mean that the REIT has issued new units priced at sharp discounts to raise funds.

Most S-REITs have always justified their acquisitions as yield-accretive, but investors should be looking for DPU-accretive. If a REIT has to resort to cheap fundraising via deeply-discounted rights or placement of shares to fund an acquisition, the transaction should not be consummated as it erodes shareholders’ interest. Throughout the author’s experience, I have not seen many REIT acquisitions, financed by cheap rights or placement shares, do well in their share price. Instead, he has seen REITs that grow their assets well and only embark on careful accretive acquisitions steadily, do well in their share price.

The better-performing REITs in the past two decades have been able to exhibit an increasing DPU growth profile, despite capital raising via placements or rights issues. Also, the better-performing REITs have balance sheets that are not unduly geared, have strong interest covers and can borrow from banks at competitive interest rates. WALEs are longer and debt maturities are well-spaced out to avoid refinancing shocks arising from events like the GFC or when interest rates start to move up. REIT managers can have excuses and attribute lower DPUs to higher interest expenses or what-not, but if they do not deliver positive DPU growth, the REIT price will suffer along with the investors.

Dividend or DPU Yield
DPU Yield = (Annualized DPU/REIT Share Price) * 100%

The dividend or DPU Yield is a good benchmark for comparison of REITs within the same sector as well as to compare over time. As it is dependent on the volatility of the underlying share price, it could be a good indicator of the REIT’s attractiveness because if the yield goes up, it would mean that inversely, the share price had come down and vice versa.

Yield Spread
Yield Spread = Dividend or DPU Yield – Risk-free Rate

The yield spread is an indicator of the risk premium when investing in a REIT as compared to the risk-free rate which is normally proxied by the respective country’s 10-year bond yield.

Operating Balance Sheet Metrics

Balance Sheet
REITs, more so than other kinds of business, are heavily dependent on the debt market cycle, the interest cost and the ability to raise financing from their shareholders. Thus, all these items are important in assessing the balance sheet of the REIT to help determine its financing needs.

In recent years, the accounting board has allowed REITS to classify 50% of Perpetual Equity raised by REITs to be classified as equity and the other 50% as long-term debt. For the conservative REIT investor, it is best to classify 100% of Perpetual Equity as debt.

Distribution Statement (aka Statement of Funds Available for Distribution)
Distributable Income = Net Income + Non-cash Expenses – Non-cash Income

The difference in the distributable income and net income is the nature of non-cash items which include depreciation, amortization, cost of forex hedge, gains or losses from revaluation gains and management fees paid in units.

In recent years, many REITs have alluded that because they take their management fees in units instead of in cash, their interests are aligned with those of minority shareholders. Gabriel finds such statements rather shallow and difficult to understand as management fees are still paid to the REIT managers. No discount to the total fee amount is given and the managers can sell these units in the future with no time moratorium.

What the smart and sharp REIT investor should pay attention to is the gains and losses from revaluation gains of the REIT’s properties as they are one of the earliest indicators of either over-payment by REIT managers for the purchase of assets (which no manager will admit and will be an event that will only be known later) or the margin of safety that managers bring to bear on their asset acquisition strategies.

Gearing
Gearing Ratio = Total Debt/Total Asset * 100%

Dividends are essentially paid from profits which are distributed after meeting expenses like interest charges, management fees, insurance and other fees. Therefore, the gearing ratio is one of the most important considerations for a REIT as it shapes the debt profile and susceptibility to volatile capital market conditions.

REITs should leave a generous buffer from the maximum gearing ratio as that can leave the share price vulnerable on the downside when the capital market changes in a short space of time. REITs with the lowest gearing would have the greatest flexibility in future expansion with a stronger debt headroom.

As REITs need to revalue their values of properties every year, any downward revaluation will result in lower asset values. This will then increase the gearing of the REIT. This effect becomes more pronounced during an asset down cycle or economic recession or slowdown. Very often, the share price of REITs will react sharply to such events, thus the smart and sharp REIT investor should always be anticipating such a possibility.

How much to pay for a REIT?

A REIT’s value is the collection of all its properties within its portfolio. Thus, how much to pay for a REIT intuitively begs the question of how much to pay for the value of all its assets plus a premium or discount for the REIT manager’s expertise and the strength of its sponsor.

There are two approaches to valuing a REIT – the yield-based approach and the asset-backed approach.

Yield-based approach
The unique thing about REITs is that they offer steady dividends and potential for capital gain in the share price. The relative stability and higher dividend as a percentage of the Total Return feature of REITs gives REIT investors great comfort in investing.

The starting point for any yield-based valuation approach is the risk-free rate. In Singapore, the Singapore 10-year bond yield is normally used as the risk-free rate. As REITs, like equities, are more volatile than government bonds, expected yields demanded by investors are naturally higher.

The question is how much? The answer to this question rests on –

DPU growth of the REIT
Quality of DPU growth of the REIT
REIT manager’s track record
Quality of the sponsor
Portfolio and sector exposure
Investors’ perception of how well-run the REIT is

The REIT investor must recognize that relative-yield valuation benchmarks change constantly with prices and prices can have a feedback loop back to valuation benchmarks. REIT valuation is part-science and part-art. The smart and sharp REIT investor should always reconcile the conditions where conventional valuation benchmarks no longer become a good guide and when to let their REITs run to enjoy more profits and capital gain.

Price/Book Value (P/BV) or Price/Net Asset Value (P/NAV)
P/BV = Share price of REIT / (Total Assets – Total Liabilities) per unit

The P/BV or P/NAV is a good measure to assess if the REIT manager is prudent in the allocation of shareholder capital. NAV or Book Value measures the current market value of the REIT’s properties and if the REIT manager had been acquiring well, valuations of the underlying asset should steadily increase and show up in the NAV or Book Value.

If a REIT’s shares are trading at a significant discount to NAV, management should shrink its portfolio by selling the least performing assets or lowest growth assets to pare down their debts. If not, they should embark on buying back their shares below book value, although this has to be balanced with the view of not increasing its total gearing or leading to a deterioration of its interest coverage ratio

REITs that enjoy trading at a huge premium to their book value or NAV do so due to multi-faceted reasons. It could be because the property sector they are in is in favour or that seasoned investors rank their REIT managers highly. It could also be because the REIT has a strong sponsor. Alternatively, the premium may indicate that the shares are overvalued.

Some of the best-performing REITs have high P/BV or rising NAVs from either rising asset valuations and more accretive acquisitions or both. The faster recovery in the prices of REITs with higher P/BV or P/NAV during the COVID-19 crisis confirms once again that investors are more willing to pay for better-managed REITs.

Markets tend to pay a premium for REITs with good management teams and strong sponsors that undertake acquisitions with financing structures that are favourable to minority shareholders. The other common factors among those REITs that outperform are those whose managers have consistently added value through rigorous and careful property management and undertake smart AEIs (Asset Enhancement Initiative) that achieve good NPI yields.

Conversely, if a REIT trades at a sharp discount to its NAV or book value, it could be a reflection of the down cycle faced by the REIT in its property sector or the market’s view that the REIT’s assets are subpar or the manager or sponsor is destroying shareholder value, in which case the shares are cheap for a reason and should be avoided.

Dividend discount model (DDM)
Both the yield-based approach and the P/BV or P/NAV approaches are relative valuation methodologies that try to derive the valuation relative to the yield behaviour or how the P/BV behaves, relative to its peers and over a period of time for comparison purposes.

The DDM seeks to determine the intrinsic value (IV) of the REIT. It is the summation of all future DPUs discounted to present value.

The DDM, detailed though it may be, may not be an accurate way to value a REIT as there are too many assumptions involved. The multi-varied assumptions cannot be simplified into just a few numbers that become the variables in the DDM calculation. Also, slight changes in a few key variables can throw out a wide range in prices.

Capitalisation ratio (Cap rate)
Cap Rate = NPI or NOI/Property Value * 100%

The cap rate seeks to measure the NPI yield of the property. It is also a good measurement of the relative attractiveness of one property compared to another in the same area or grade. It also indicates if a REIT manager has overpaid for a property or gotten a good deal.

An attractive REIT derives good cash flows from the quality assets that it owns. Thus, the cap rate essentially tries to capture how attractive the property is in terms of the yield.

A good grasp of the cap rates of the various types of properties and over different periods of time is highly useful in appreciating and understanding the highly cyclical nature of cap rates and the factors that affect it. Many investors tend to compare cap rates to the government 10-year bond yield to get the cap rate spread which normally helps shape the margin of safety in investing in certain properties.

In cases of acquisitions, a capitalization approach based on a sustainable net income on a fully leased basis is normally used in conjunction with understanding the current passing rental income and other relevant expenses.

The cap rate is a good measurement of the relative attractiveness of one property compared to another in the same area or grade. It also indicates if a REIT manager has overpaid for a property or gotten a good deal.

Discounted Cash Flow Analysis (DCF)
Similar to DDM, the DCF is used to value the REITs’ properties. It seeks to allow an investor or owner to assess the long-term return that is likely to be derived from a property with a combination of both rental and capital growth over an assumed investment horizon.

The smart and sharp REIT investor should understand that in undertaking such analysis, a wide range of assumptions have to be made including a target or pre-selected internal rate of return, rental growth, occupancies, sale price of the property at the end of the investment horizon, costs associated with the initial purchase as well as the associated costs at the disposal of the property. It is a highly difficult task and the room for deviation from the actual calculation will be wide.

Replacement Cost Method
The replacement cost method approaches valuation from a replacement valuation perspective – it questions how much it would cost to build a similar property to the same specifications in a particular location.

Comparable Sales Method
It provides an observable value for a property acquisition against other recent transactions. It is one of the most widely used approaches as it is easy to use, to calculate and the date is the most current.

The risks of investing in REITs

Refinancing risk
Borrowings are an integral part of REITs. Essentially, the lifeblood of a REIT is the ability and need to procure financing at reasonable costs and in the quantum needed.

The need to use leverage also means that the REIT may need to incur additional expenses relating to additional fees incurred in connection with borrowings, in addition to interest payments payable on the loan amounts drawn. For the REIT shareholder, it is crucial to pick REITs that do not land you in a vulnerable position when the REITs resort to rights issues to raise capital during a crisis. A crisis is when prices of most, if not all REITs, are at the cheapest, but it can also be a time when investors are most strapped for cash.

Gearing or leverage ratios are good indicators of how the REIT’s assets and business operations are financed. Studies have shown that REITs with high debt-to-equity/asset ratios will have higher financial distress costs. During a crisis, real estate and REIT values declined substantially, forcing REITs with high debt-to-equity/asset rations to divest assets at low prices and raise capital on the stock market at high cost in efforts to pay off interest expenses and loans that become due. Examples: MacarthurCook Industrial REIT and Allco Commerical REIT.

Although leveraging as a financing method can result in higher dividend yields and attract REIT investors, they come at a greater price risk. Debt financing should only be implemented wisely to avoid higher price volatility as the REIT stands to lose investors who have low tolerance for higher credit and refinancing risks. REIT managers who wish to raise capital through debt financing instead of equity should be cognizant of market timing. Ideally, debt should be drawn down when the cost of debt is low or during times when the cost of equity is high.

Interest rate risk
Interest rate risks for REITs show up as Cost of Funds (COF) or financing costs. Interest rate risk is a perennial risk when loans mature.

Over the years, the S-REITs that have exhibited lower COFs or financing costs tend to have either a strong sponsor, a good REIT manager or good quality assets where banks are more comfortable to lend to and lend on or a combination of the above.

The COF is a good way of interpreting what the bankers of the REITs are conveying to investors. If a REIT continually suffers from high COF or financing costs, it is a high reflection of a combination of non-optimal sponsor, manager or quality of assets. High COF or financing cost makes further acquisitions more difficult as banking covenants are more demanding and suck away at precious cash. This becomes more important when interest rates are rising.

Excessive reliance on capital markets
Many investors love the stability and frequency of REITs’ dividends or DPU. This allows the shareholders control over free cash flow, earn steady and growing dividends and minimize re-investment risk. This would normally leave little cash buffer for REITs which may force the REIT manager to tap external capital markets if and when it needs to make huge acquisitions. This is not negative per se as it allows minority shareholders to constantly review a REIT’s acquisitions which effectively adds another layer of scrunity.

An important telltale sign is the lackadaisical growth in DPU and NAV despite huge growth in AUM with an aggressive acquisition strategy.

Investors should be able to see if acquisitions bear fruit and the quality of the fruit first before REITs continue on their acquisition spree. The impact of past acquisitions on a REIT’s DPU growth should be studied and understood by the smart and sharp REIT investor first. A REIT cannot assume that all its expansion plans are clearly understood by investors in potentially disruptive times. The consequence will be on the share price.

Income risk
Dividends may not be paid if a REIT reports an operating loss or like what COVID-19 brought to roost – if tenants are allowed under temporary legislation, to defer their rental payments.

Concentration risk
A REIT with a good mix of tenants is less exposed to concentrated and idiosyncratic risks, especially risks of known unknown implications or of unknown unknown nature.

Liquidity risk
An illiquidity shock in one market can influence the demand for the asset and related assets in the same sector. The real estate in a REIT may be relatively less liquid or subject to government regulations of usage. This gives rise to liquidity risk for REITs as it can become difficult to quickly find buyers for property on short notice should there be any adverse economic conditions. Example: Soilbuild REIT

A REIT will struggle to achieve sustainable growth if it overpays for assets which can be clearly seen in its declining DPU performance. Investors should always avoid REITs that undertake acquisitions with minimal margin of safety or capital recycling or new acquisitions with little benefits to shareholders.

Investors expect REIT managers to implement and undertake effective asset and risk management using fruitful acquisitions that are yield-accretive, profitable divestments or undertake capital recycling opportunities that enhance the value of a REIT.

How REITs grow and how investors grow with REITs

Broadly, REITs generate growth organically or inorganically.

Organic growth

Organic growth for REITs refers to growing the REIT’s portfolio naturally. The three methods of organic growth are Rental Reversion, Asset Enhancement Initiatives (AEIs) and Capital Recycling.

Capital recycling
S-REITs are increasingly focused on capital recycling programs, selling off non-core properties and using the proceeds to purchase new assets that improve the quality of their overall portfolio or to undertake AEIs.

Capital recycling entails selling underperforming assets and channelling funds into assets with stronger yields or better quality.

Ideally, what investors want is for the REIT to achieve quality upgrades and enhance long-term growth while being mindful of the cost of capital, leverage and capital market issues like the direction of interest rates. This is often easier said than done and very few REIT managers have been able to achieve this level of capability, despite being backed by an army of bankers and advisors who are supposedly more in tune with the fluidity of financial market conditions.

First, the REIT must decide what to sell. Most REITs would like to sell their “worst” properties. However, the “worst” properties could have the most potential for DPU and earnings dilution as the cap rates are normally the highest, making the yield very difficult to replace.

On the other hand, selling the “best” properties may mean missing out on the best long-term growth potential.

Recycling programs are easy to announce, but practically, it is harder to implement because when a REIT sells assets, they lose near-term income. So, unless they can replace the assets quickly, the NPI, Distributable Income and DPU are going to take a hit.

Repeated good sense of market timing and/or luck can hint at astute management reading of markets. This is what the sharp and smart REIT investor should be looking out for.

Inorganic growth

Acquisitions
Acquisitions are undertaken by REITs to achieve scale effects as well as deepen and/or diversify the income streams.

Investors value growth stories for REITs, even though the key attributes of REITs as an investment vehicle are regular, stable and consistent dividend growth with minimal risk. Empirical evidence in the past two decades has now revealed that shareholders benefit when responsible REIT managers engage in property acquisitions that lead to higher earnings.

Greenfield or brownfield development
REITs in Singapore can undertake property development utilising up to 10% of their property value in greenfield or brownfield development.

Greenfield development is seldom undertaken by S-REITs as the business of property development is often left to the parent and/or sponsor who are usually big property developers. Of course, the developed property is often sold to the REIT thereafter.

How to analyse REIT acquisitions

In any REIT acquisition deal, REIT managers have dual obligations. They should make sure that they can show and convince shareholders that the acquisition is a positive net present value investment and at the same time, demonstrate that the acquisition is consistent with the REIT’s growth strategy. Investors must fully understand the nature and quality of the assets being acquired, the domicile of the assets and the way REIT finances the acquisition.

In the practical world, the smart investor should also understand that good and highly-accretive acquisitions are usually hard to come by during bullish market conditions. They normally coincide with easy-money market conditions when interest rates are low, but asset prices are relatively high. In contrast, during cyclically-down market conditions, there may be many bargain-buys, but financing may be expensive and interest rates are high.

S-REITs that can consistently make DPU-accretive acquisitions and employ shareholder-friendly financing structures to finance such acquisitions will be winners in the REIT sector. Such REITs will help enhance total return to unitholders and increase the potential for future growth of the property portfolio through their astute acquisitions. Example: Keppel DC REIT

Characteristically, most of the acquisitions shared the same important hallmarks: solid lease agreements that protected unitholders, lengthened portfolio WALE, and were good quality assets acquired at reasonable good prices, i.e. without overpaying. All these factors are instrumental in achieving continued share price rise and sustained DPU growth.

The sharp and shrewd investor looks for REITs that make value-enhancing returns from the DPU accretion that new acquisitions bring. REITs that can deliver outsized DPU accretion from asset acquisitions will be the winners and outperformers.

Existing shares are diluted minimally.
The private placement discount should be small.
Existing shareholders have a chance to participate in the share offer and apply for excess rights shares.
It is a highly DPU-accretive acquisition exercise that would enhance DPU.
The financing structure employed helps to raise more than sufficient funds that decrease its gearing ratio (a rare feat).

The share price performance thereafter will testify to the market appreciation of such deals.

In summary, the key benchmarks to judge whether a REIT has made good acquisitions are:

A fair or cheaper-than-market price paid for the asset
Whether the acquisition leads to a steady and longer WALE
The lease structure of the newly acquired asset
The quality of tenants
DPU accretive impact
Yield accretive impact
NAV accretive impact
Financing structure to be advantageous to minority shareholders as placement shares were only on a slight discount to the VWAP and last done price

The S-REITs that will do well in future acquisitions will be:

Those with a strong acquisitions pipeline.
Those with strong sponsors have shown that asset injections will be at win-win prices for both sponsors and shareholders
Those with strong AEI potential and asset recycling potential.

Smart REIT investors should always be wary of REITs that undertake yield-accretive acquisitions, but are in fact, non-DPU accretive after taking into account the timing and capital market conditions. Some managers excuse themselves that “capital market conditions have changed” to account for non-yield or non-DPU accretive acquisitions, but it is an excuse that should be frowned upon. It is a simple rationale – if you are paid handsomely to professionally manage the REIT, you should have the expertise or foresight to judge the timing of critical market operations which can have profound dilutive effects on shareholders.

How I made my millions in REITs

The true colours of a REIT, like a person, and how good or bad it is, is most evident during a crisis. Good REITs can still strengthen their operational efficiencies and serve up steady fundamentals during a crisis. The smart and sharp investor should incorporate crisis management in his/her investment process as crises are the best times to buy good REITs at dirt-cheap prices.
The best time to buy is when the market punishes the REIT price, but the smart investor should know the REIT’s quality of assets well enough to decide whether prevailing market prices are presently undervaluing its quality assets. The perspicacious investor should take note that invaluable bargains can be found during market corrections. And market corrections should be part and parcel of investing in a REIT.
The author is always wary of REITs that grow their revenue and NPI, but not their DPU. REITs must realize that the two components of total return for shareholders are rising DPU and a rising REIT price. Moreover, the former is a huge lynchpin for the latter. It is a very simple principle, but investors will find this lacking in those REITs that have not been able to perform.
A good REIT is as good as the assets that they have. It is still able to increase the key metrics of revenue, NPI and DPU growth over time on the same mix of assets if the assets are indeed good assets from the onset.
DPU and DPU growth are probably the most important considerations for any REIT investor. A REIT’s ability to grow its DPU over time is essential for generating good long-term returns for its unitholders. In fact, investors would prefer REITs whose management is conservative and can consistently add value to their strong portfolio of assets and achieve consistent, higher NPI yield.
The per unit information of a REIT is more useful than merely looking at the REIT’s overall performance as it takes into account any dilution that may have occurred during the period under study.
Markets will pay a premium for REITs that can deliver positive NPI and DPU growth, even without active acquisitions. Strong sponsors that undertake acquisitions with financing structures that are favourable to minority shareholders are an added plus. The other common factors amongst those REITs that outperform are those whose managers have consistently added value through rigorous and careful property management and undertake smart AEIs that achieve good NPI yields.
Consistent and steady improvements in NAV are very important indicators of performance for investors as they reflect in total, whether management had bought the asset on the cheap or whether management had been sharp and got a good price for the asset in a sale. These will be mirrored by the gradual improvement in its asset value, marked by gradual and consistent tightening of the properties’ capitalization ratios or cap rates.

When to sell your REIT

Price had risen too fast in a short period
Take profit when share prices have become overstretched even when the fundaments are still strong
Never fall in love with a REIT

Published by Lifenotes