REITs are collective property investment trusts that pool money to invest in properties. Investors can purchase units of a REIT through the stock exchange.
Structure of how a REITs function:
REITs achieve separation of powers and duties by segregating the roles of ownership and management of the REIT assets between the Trustee and REIT Manager.
The trustee is responsible for the ownership and safe custody of the REIT’s assets. In exchange for providing the services, the trustee is paid a fee.
The REIT manager is just like the chief executive officer(CEO) of any listed company. The REIT manager is a separate company set up to run the REIT. It is usually a wholly-owned or partly-owned subsidiary of a REIT’s sponsor.
The REIT manager has the authority to appoint Property Managers for each property managed by the REIT, whose role is to manage the day to day operations and maintenance of the property. Usually the property manager are often a subsidiary of the sponsor.
Fees are charged by the trust manager as well as the property manager. Together with finance costs, utilities costs and property taxes, these charges account for a major part of a Reit’s operating expenses.
General typical REIT Structure:
Source: REITS to RICHES, written by Tam Ging Wien. Get the eBook here.
Real life example of Frasers Centrepoint Trust REIT Structure:
Source: Frasers Centrepoint Trust corporate website
So what are the key differences between a REIT and a Business Trust?
Investors need to be aware that there are important differences between Real Estate Investment Trusts (REITs) and Business Trusts. The confusion usually arises because both are listed on the Singapore Exchange as “trusts.”
A REIT can only own and operate income-generating real estate assets. A REIT requires a trustee to hold the assets and a separate manager to manage the assets for unit holders. In Singapore, REITs must pay out at least 90% of their taxable income to unitholders each year. They are also limited to a maximum gearing ratio of 45%. The restrictions can hinder a REIT’s business, but they do come with some benefits. For instance, REITs enjoy favourable tax treatments compared to other types of companies.
Business Trust is different from REITs in one basic way. While the latter has to be involved in real estate a Business Trust has no such restriction. It can operate in any field. The trustee of a business trust is considered the trustee-manager and so it’s the same entity which owns and manages the assets on behalf of the unit holders of the business trust.
With 7 different types of REITs in Singapore, find the one depending on your risk appetite and the sector that interest you the most:
|Healthcare – Given our high medical inflation, health care REITs will be an interesting one. Mainly focusing on investing in hospitals, medical centres, nursing and retirement homes.||Parkway Life REIT|
|RHT Health Trust|
|Hospitality – Hospitality REITs focuses on properties the hospitality side of the business, owning properties such as serviced apartments and hotels.||Ascendas Hospitality Trust|
|Ascott Residence Trust|
|CDL Hospitality Trust|
|Far East Hospitality Trust|
|Frasers Hospitality Trust|
|OUE Hospitality Trust|
|Retail – Retail REITs invest in shopping malls and freestanding retail.
Offices – Commercial REITs such as the all so familiar CapitaLand Commercial Trust emphasize on office buildings.
|CapitaLand Mall Trust|
|Frasers Centrepoint Trust|
|CapitaLand Retail China Trust|
|Lippo Malls Indonesia Retail Trust|
|BHG Retail REIT|
|Starhill Global Real Estate Investment Trust|
|Mapletree Commercial Trust|
|Industrial – Industrial trusts are mandated to invest in real estate related to industrial spaces that are general non-customer facing such as warehouses, factories, cold storage sites and industrial parks. Industrial trusts will no doubt be affected during an economic recession when business are severely affected. Some may choose to scale down their operations to reduce the cost, directly impacting the tenancies of the trust.||Ascendas Real Estate Investment Trust|
|AIMS AMP Capital Industrial REIT|
|Cache Logistics Trust|
|Mapletree Industrial Trust|
|Mapletree Logistics Trust|
|Residential – Residential trust pretty straight forward, which are your housing estates such as houses, condominiums/apartments, serviced residences or residential estates. Residential trust are considered cyclical in nature and have similar characteristics and are influenced by cyclical in nature and have similar characteristic to hospitality trust.||There are currently no residential REITs or stapled securities listed in Singapore.|
|Data Centre – Data centers are secured, infrastructure-dense facilities that house servers and other network systems. Most data center operators follow a wholesale or retail model, or both (hybrid model).||Singapore: Keppel DC REIT|
|Hong Kong: SunEVision|
|Other Specialized Trust – They are specialized in the specific industry. Example like Hutchison Port Holdings where their interest is in deep-water container port assets,located in two of the world’s busiest container port cities – Hong Kong and China. These volumes tend to be higher during economic upcycles and lower during downturns.
Similar to container ports, shipping business are also cyclic in nature as the demand of ship leases are dependent on the economic cycles.
Investors should be more mindful about investing in these trusts, as unlike real estates, the assets are subjected to depreciation over time.
|Hutchison Port Holding Trust|
|First Ship Lease Trust|
|Asian Pay Television Trust|
|REIT ETFs provide diversification as it owns numerous REITs in its portfolio. Its portfolio will be exposed to all types of sectors. You can trade REIT ETFS as well on the SGX.||Lion-Phillip S-REIT ETF|
|NikkoAM-Straits Trading Asia Ex Japan REIT ETF|
|Phillip SGX APAC Dividend Leaders REIT ETF|
Like all companies whose stocks are publicly traded, REIT shares are priced by the market throughout the trading day. To assess the investment value of REIT shares, analysts typically consider:How is the value of REIT shares typically assessed?
- Anticipated growth in earnings per share;
- Anticipated total return from the stock, estimated from the expected price change and the prevailing dividend yield;
- Current dividend yields relative to other yield-oriented investments (e.g., bonds, utility stocks and other high-income investments);
- Dividend payout ratios as a percent of REIT FFO
- Management quality and corporate structure; and
- Underlying asset values of the real estate and/or mortgages and other assets
Real Estate Investment Trusts (REITs) are often described as instruments that offer investors the opportunity to invest in a professionally managed portfolio of real estate, through the purchase of a publicly-traded investment product. The investment objective of REITs is to provide unit holders with dividend income, usually from rental income of the REIT’s properties, and capital gains from the profitable sale of real estate assets. This might sounds appealing, but do not assume that all REITs are low risks and that dividend income are incurring. Read on the prospectus and research reports to understand the investment objective and strategy of the REIT (use reference from above pointers).
What is the difference between Physical Properties vs. Publicly Traded REITs
Physical properties locks in your purchases when you sign on the dotted line. Carrying out a research on these physical properties can be difficult, given that getting information about their financial or property holdings can be a challenge. Another major drawback is the fact that they are illiquid. The ability to buy and sell them is significantly affected. Physical properties are not suitable for short term investors. A huge advantage of investing in physical properties is that you can get a lot of leverage up to 80% for a large absolute sum of money at an incredibly low interest rate of 1.7% range. It has to adhere to the Total Debt Servicing Ratio (TDSR) and Loan-To-Value (LTV) limits.
Publicly Traded REITs, on the other hand, are real estate investment trusts that are publicly traded and are regulated by authorities. Such securities are obliged to choose right management teams and the quality of their properties is usually based on up to date trends.
Here are the common financial evaluation of trusts:
Capitalization Rate (CapRate):
The CapRate is the rate of investment return from a property asset. It is used to measure how quickly a particular property was fully acquired with cash. For example, if a property has a CapRate of 4%, it means that the cost of the property will be completely recovered in 25 years time.
Net Property Income Yields (NPI Yield):
The NPI Yield is the ratio of the NPI against the revenue of the trust. It is similar to the operating margins of a business. Therefore, a comparison of the NPI Yield of various REITs in the same class will provide a quantified measure of the efficiency of management at managing the revenue and expenses of the property portfolio. It can also be used to compare the efficiency of the management between financial periods.
Distribution per unit (DPU):
REITs dividend payouts can occur every six months, or quarterly. Payouts are calculated via Distribution per Unit (DPU) and yield.
DPUs measure how much an investor gets for every share he has in the REIT. If the DPU is $0.0361 per share, for example, you would get ($0.0361 x 1,000) = $36.10 per lot of 1,000 shares.
Annualized Distribution Yield:
The annualized DPU refers to the total DPU for the entire financial year of the trust. The annualized DPU is simply the sum of all the DPU declared in the financial year. A distribution yield is a measurement of cash flow paid and how long will the investor take to breakeven for a unit in cash. For example, if a trust is priced at $20 per share collects 8 cents in interest payments during a month, the interest is multiplied by 12 for an annualized total of 96 cents. Dividing 96 cents by $20 gives a distribution yield of 4.8%.
Net Asset Value:
NAV is the total assets minus the total liabilities of the trust. The NAV per unit is the remaining assets of the REIT in which the unit holders will receive per unit in the event that the REIT is liquidated, and after its assets were sold off and used to pay off existing debts to debtors and bond holders. The earnings report will usually list the assets and liabilities for the same quarter of the previous year alongside figures of the latest quarter.
REIT’s funds from operations (FFO)
One of the key metrics include REIT’s funds from operations (FFO) and adjusted funds from operations (AFFO). FFO strips off cost-accounting methods such as depreciation of investment properties that may inaccurately distort a REIT’s cash-generating ability. The FFO is the same as operating cash flow of a company, while the AFFO is like a company’s free cash flow.
The gearing ratio refers to ratio of a company’s level of debt compared to its total assets. It can also be calculated manually by dividing the REIT’s total borrowings from the total value of its assets. A real life example, First Real Estate Investment Trust, a healthcare REIT listed in Singapore. As at 31 December 2017, First REIT had total assets valued at S$1.42 billion and had total debt of S$478.6 million. By dividing the total debt by the total assets, the gearing ratio stands at 33.6%. There is a regulatory gearing ceiling of 45%. As such, from the above, we can see that First REITs gearing ratio is well within the regulatory limit and it has the debt headroom for growth.
These financial metrics are usually widely available in presentation slides for investors. Therefore, many of the financial metrics described above can be obtained directly from these slides. It is still useful for investors to understand the foundational knowledge of how these metrics works and how it is derived.
Some of the sources are cited from REITS TO RICHES by Tam Ging Wien.
If REITs seem too risky for you, you can look into bonds and fixed income.
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