8 Key Points to Study When Analysing REITs
A disclaimer for this section: in investing, there is no fool-proof method of identifying a ‘sure winner’. It simply doesn’t exist—don’t believe anyone telling you otherwise, because they are trying to sell you something (that probably isn’t to your benefit).
What this section will do is give you some key points to study when analysing individual REITs. You can find this information by looking up a REIT’s financial reports, which are publicly available.
#1: Property Portfolio
Probably the most important thing when considering a REIT—what properties does it own? In some cases, such as the IGB REIT, which owns Mid Valley and The Gardens malls, you can even go there and check it out yourself. Remember, each of these properties is a business in its own right, so if you have the chance, seeing it for yourself can help you make better judgments.
When assessing a REIT’s property portfolio, look at their locations, occupancy rates, and level of diversification. Diversification has two components—within the properties themselves (tenant mix) and how diversified the portfolio itself is.
#2: Dividend/Distribution Per Unit
The amount of dividends issued to unitholders on a per unit basis. An increasing dividend per unit amount generally shows a healthy business generating growing cashflows.
#3: Dividend Yield
As mentioned, the dividend yield is calculated by dividing a REIT’s dividend per unit by its unit price. This is somewhat like the calculation of rental yield in traditional property investing.
Dividend yields are a good way to benchmark a REIT against other REITs as well as other investment asset classes (e.g. stocks). A REIT that has a high dividend yield relative to its peers may mean that its price is low, signalling undervaluation. The opposite case—a comparatively low dividend yield—may indicate that its price is too high and thus potentially overvalued.
#4: Net Property Income
Net property income is the REIT’s gross revenue after deducting property taxes, maintenance fees, and other operating expenses. It does not account for fees charged by the REIT manager (but net income does). Looking at the trend of a REIT’s net property income over the years will give you a good indication on the REIT’s performance. Just like dividends per unit, steadily growing net property income figures are generally a sign of a healthy business.
#5: Capitalisation Rate / Property Yield
While dividend yield measures the return to the investor and can help us assess its current market price, it is not the only metric investors use for doing so. A REIT’s capitalisation rate or property yield is another common valuation metric assessed in tandem with its dividend yield.
This metric is calculated by taking its Net Property Income and dividing it by its current market value. Much like how price-to-earnings ratios are used as comparative benchmarks for stocks, property yields are a common valuation metric used to compared REITs against each other.
Keep in mind that there are no absolutes when it comes to cap rates. A REIT with a cap rate of 10% is not necessarily better than a REIT with a cap rate of 8%. Just like how stocks with lower P/E ratios (which some call value stocks) are not necessarily better than those with higher P/E ratios (which may be growth stocks). A stock may have a lower P/E (valuation) because the market deems it to be of higher risk. The same goes for a REIT’s cap rate. Don’t take it as a be-all-end-all in assessing a REIT’s current valuation.
#6: Gearing Ratio
The gearing ratio is simply the REIT’s total borrowings over its total assets. While this is capped at 50% by regulations, a REIT with gearing at or close to that 50% cap means that it has limited room to finance more growth. However, this is situational; gearing may have increased because of a recent acquisition, for example.
#7: Asset Enhancement Initiatives
Asset enhancement initiatives are any actions that can improve the value of the underlying properties. An example would be expanding a mall—this would increase the number of tenants which means more rental income (and more dividends paid out).
A strong and credible sponsor can mitigate some of a REIT’s risks. Given that such sponsors are often publicly traded themselves, they would want to avoid any negative events happening to their REITs, and thus could reasonably be counted upon for support in times of distress.
Where Can You Find the Most Up-to-Date Information on These Metrics for M-REITs?
While many of the above metrics aren’t difficult to calculate, it is no doubt a tedious process. For investors looking to get a quick snapshot of the M-REIT market, this site provides live information on all the REITs in Malaysia and their latest metrics.
Here is a quick snapshot as of 5 March 2020.