The real estate investment trust (REIT) and business trust is a segment of stocks that resonates well with investors because the underlying idea is something that investors are very well acquainted with.
They provide an annual cash flow and a varied degree of growth depending on the underlying assets and when added to the portfolio provides some stability if you are invested in higher volatile small caps.
The combination of cash flow and growth gives a total return. For some reference, I came up with a look at the total return since IPO of 2 REITs Keppel REIT and CapitaRetailChina REIT in the past.
In recent months, due to the news that the low interest rate environment is going to undergo a secular shift, the prices of these stocks have come down a fair bit.
I just thought I would comment on some of the REITs and business trust that caught my attention.
These REITs currently trades with a yield of 7% to 9.5%.
Some things to take note of before I go on
Readers should read with the following in mind.
The stocks highlighted is not what I think is a good buy NOW or in the near 3 months. It is just based on my understanding, my bias opinion how I see these stocks.
If you do not have a good grasp of these income producing stocks, especially the good points and bad points of them, the criteria to evaluate them, and buy based on this, your results may vary.
Here are some general thoughts on this class of stock:
- Valuation is important. Ignoring which class of stock, valuation is important in everything. If you buy something too expensive, you are going to get your capital impaired despite what income it will give you. The value of the stock is the aggregation of future cash flow.
- If you buy a REIT that is too expensive to what we think it is valued at, and it takes 10-15 years to break even on your capital, that is not a good investment. That does not mean it is not a good REIT. It is that you did not invest well.
- REITs and alike business trusts is a manager managing a bunch of assets. There is just so much to it. The value add is in the manager first and foremost. You get a manager that does not manage well, or that their hands are tied because they are under their sponsor’s command, there is just so much they can do.
- Because they are a bunch of assets, what you pay and the reasonable margin of safety is important. For all the problems of some of the REITs, if they are on fire sale and you can buy them for $20 mil, it is still a good investment! A good REIT may not be a good investment. A bad REIT may not be a bad investment.
- The economic and business outlook going forward is more important than the interest rate risk. Interest rate risk is important, but to me that is just reactionary. Everyone knows there is a certain likely scenario that the rates will go up. As a manager it is how you source for better financing, structuring when the debts will mature, basically how you manage it (and again it shows the value is in the manager). The reason interest rate go up is to prevent overheating or to manage the acceleration. If there is no growth, increasing interest rates will kill. If the business outlook is damn good, managing the borrowing will result in value add in much higher rental revision and thus DPU and share price growth. If the 10 year risk free rate is at 4% and the baseline net property income pays 10%, there is nothing wrong with that really. it is when the business outlook for these properties are so unfavorable and they are raising rates, that will be a problem.
- I have no idea how currency will go. It is a risk to each REIT that have external exposure. So you would have to exercise your own research work and opinion here.
- Book Value is not cast in stone. What might look very undervalued based on PTB may suddenly look fairly valued when the properties revalued in a market where future outlook for property rental looks drastically different. What used to rent for $10 psf in the past may rent for only $5 psf in the next 5 years and that would affect the valuation.
- This acts as opinion for your further research, not as a confirmation that what you think is good is right since Kyith likes it.
1. YTL Starhill Global REIT
Starhill Global REIT is a retail REIT that have a high contribution coming from Ngee Ann City and Wisma Atria but is also geographically diversified.
Starhill Global have assets in Singapore, Australia, Malaysia, China and Japan.
Very diversified and therefore they undergo much currency fluctuations from their rent as well.
Starhill Global have a certain predictability in their income stream due to the Master Lease of Ngee Ann City to Toshin and recent acquisition Myer Centre Adelaide.
The recent acquisition is freehold and a long lease till 2032 with have annual escalation of 3.5%-5% or CPI annually whichever is higher.
There are negatives to long leases in that, if there are boom times you cannot take advantage of it.
Starhill soughts to have a mixture of it, but if you are looking for predictability Starhill has it.
Another pleasant point why I favor it is because it is not Singapore Centric now so there is that diversification in the even Singapore do not do that well. The negative of this is that, manager competency needs to evaluate well.
Starhill probably yields forward 7% and when compared against most of the REITs the Price to Book is not at historical lowest, other than Suntec, you do not find much retail REITs trading below NAV.
Discount the 10% yield recently, as that is a one off situation.
2. Mapletree Greater China Commercial Trust (MGCCT)
MGCCT is a recently listed commercial and shopping center REIT with only 3 properties.
Festive Walk is a shopping center in the prime area of Kowloon Ton next to the MTR.
It also owns a commercial office in Beijing and a business park in Shanghai.
The great thing about MGCCT is that the 3 properties are located in very high demand areas.
Sandhill, the office property in Shanghai, is somewhat in the silicon valley of China and its rent is below the market rate. The great international companies in the high tech park likely gives a stability to the rental demand.
The office in Beijing, together with Festive Walk enjoy some 20%++ rental revision in recent years. Other the Lufthansa submarket, the supply pipeline for the Beijing office area is very limited.
Sandhill after the first revision may not revise as crazy, and the consensus on Festive Walk is that the rental growth should moderate down.
The thing about China properties are that they are limited leasehold, so their land lease make them look much like industrial buildings in Singapore.
MGCCT have a short history so viewing historical trend may not have much relevance. At 88 cents, based on historical dividend, the yield is 7.9%.
3. Mapletree Logistic Trust
This logistics trust is not the best performing industrial REIT or the biggest industrial REIT but it has been an international industrial REIT for some time.
Currency risk aside, if you are looking for a REIT that is not concentrated in Singapore and a manager that actively manages its portfolio, MLT is one to consider.
The WALE is reasonable at 4.8 years, which provides income visibility.
This is no doubt enhanced by recent Australian acquisitions which are very lengthy in duration.
The downside is that 5% and 16% of rentals are up for renewal with many of them single tenanted. These are the most susceptible to negative rental revisions.
4. IREIT Global
IREIT Global yields 9.4% roughly. That is something to sit up and take note. Also note that the gearing is 44%. Not high by office REIT standards considering Keppel REIT is also in this range.
IREIT is an office REIT in Germany.
The main play for IREIT is that its net property income yield was around 6-7% and its cost of debt being less than 2%.
The tenant lease on average is 7 years and one good thing as well is that the debt maturity is also some years away.
The leases also have inbuilt rental revision based on CPI, which is non-existent right now.
The debt and income is both in Euro, so there is no mismatched and problem here.
The dividends are hedge for only 1 year at 1.54. But longer than that you faced currency risk.
In terms of properties, majority of the tenants for the 5 properties are government, Allianz, Deutsche Telekom,Deusche Rentenversicherung and ST Microelectronics.
One potential counterparty risk is Shanghai Summit Group owner Tong Jinquan owns 57% and Soilbuild Group holdings boss Lim Chap Huat owns 19%.
5. Croesus Retail Trust
Almost the same story as IREIT, except this is in retail in Japan.
Instead of Euro currency risk, we have Yen currency risk.
The dividends are hedge for 2 years to 2017 instead of one year for IREIT.
The tenant lease on average is 8.6 years while gearing is 47%.
The yield, should the yen maintains is 9%.
6. Soilbuild Business Space REIT
The Singapore Industrial Space is getting a fair bit of supply growth this coming three years.
With the challenging manufacturing outlook and the much expensive cost of labor not to mention available of labor in Singapore, it does not bode well for the industrial sector.
The saving grace have been the business park segment, which commands higher rental per square foot but they sit in a very comfortable space as pseudo office space.
This means that the tenants who cannot take the expensive office rent have the option to move to a business park.
And looking at the next 3 years the business park supply is more limited compared to the other industrial segment.
Soil build has a dividend yield of 8.5% and have a tenant average lease duration of 4.4 years.
48% of net property income is derived from master lease agreements that is from long rental lease of 5 to 15 years with built in 2-5% per year of rental escalation.
Rent revision is expected to be muted and in all honesty, Soilbuild like the recent managers at IREIT, Croesus are incorporated after the financial crisis and we have not seen their management capabilities.
The purchase of a short land lease sale and leaseback with Technics oil and gas remains to be seen if this will leave a black mark considering the issues with the oil and gas industry.
7. Religare Health Trust
Healthcare REITs has a place in many investor’s heart because of 2 properties. The first one is that the demand for healthcare tends to be price inelastic and the second is that the master lease to the hospitals are very long.
Parkway Life REIT and First REIT are 2 where their master lease starts at 15 years with different annual revision.
The annual revision rises up with inflation so their dividends per share has a growth component.
Religare HT rents out to major healthcare provider Fortis Group. They have two sets of rent a base fee and a variable fee, with the base fee having an escalation, while the variable fee is a percentage of revenue.
If healthcare cost long term is trending up, a percentage of revenue is attractive.
Religare yield is very attractive versus Parkway Life and First REIT, yet it also comes with some currency considering that the Indian Rupee have at one point gone on a very long depreciation versus the Singapore dollars.
It is also a mystery about the alignment of the managers to work truly for the benefit of shareholders, since it is rather new.
The last concern is that the debt is in SGD and they are paid in Rupee. Currency movement in an adverse way might be a negative cost surprise.
The positive thing about Religare HT is that they are adding more beds, which ramps up the revenue and thus variable fee and that leverage is low at 15%.
REITs that are not on the list but are found on my Dividend Stock Tracker are not bad. These REITs listed are attractive enough in terms of yield, and could prove to be more attractive as price changes, and more information on how they navigate challenging scenarios are revealed.
When credit becomes tight, credit becomes more expensive, industry vacancy rises, some of these listed 7 stocks will face difficulties, and it is when we see whether the risk outcome which may happen really happen.
If it doesn’t, it may show us that these management can navigate challenging scenarios and prove to be a good investment.
It should also be noted that the more stable REITs such as Capitamalls, Frasers Centerpoint, Ascendas REIT, Keppel DC REIT, Parkway Life REIT, Mapletree Commercial may shed prices due to reasons not so much of management, change in business conditions but due to fund flows. They will make good long term candidates at attractive yield and growth, the right valuations with good margin of safety.
I ran a Dividend Stock Tracker that Updates Nightly the dividend yields and various metrics of the popular dividend stocks such as Blue Chip Stocks, REITs, Business Trusts and Telecom Stocks In Singapore. Start by bookmarking it and view it daily.
Here is my current portfolio. It is a FREE Google Spreadsheet that you can use to track your stock portfolio by transactions. It is especially good for a dividend portfolio or a passive ETF portfolio. Get it for Free Today.
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Wednesday 13th of January 2016
Read but could not find a consistent thread among the 7 that you have picked. Bear in mind the macro context and the possible headwinds. Remember, you don't have to be consistently invested and sometime, holding cash for a short term is not necessary a bad thing.
Thursday 14th of January 2016
that is a bit of speculation but yes you do not always need to hold cash. the more consistent theme is that they tend to be less singapore centric.
Sunday 10th of January 2016
Just curious, how much is the total returns of Keppel REIT now and CapitaRetail China since its inception as of today? How much has it been reduced by
Sunday 10th of January 2016
hi Choon Yuan,
in my link you can see the XIRR, but the data could be some time back. you are asking for the data NOW? the past total unrealize gained for kep reit is like 10% and the xirr is 8.33%. for capitaretailchina it is 11%. much higher. one of the best since ipo i seen is first reit at 16% since 2006 if i remember correctly.
Sunday 10th of January 2016
Rather surprised you did not include CCT in your radar
Sunday 10th of January 2016
I wanted to include Frasers Commercial, but my view is that office is ready for some really supply issues. Capitagreen is precommmitted but if you look at the yield its hardly gangbusters. What is your take on it. I can always be wrong.