Top 5 Things To Look Out For In REITs

1. Consistent Dividend History

A high-quality REIT will have an impressive dividend history with consistent dividend payments at regular intervals. Our main goal in buying REITs is to receive dividends regularly and the last thing we would want is for the REIT to stop paying their dividends. The dividend history of REITs can be broken down into three categories: <5 years of consistent dividend history, <10 years of consistent dividend history, and >10 years of consistent dividend history. Longer consistent dividend history is associated with higher quality and lower risk REIT. A good example is Ascendas REIT which has an impressive 18-year consistent dividend history. This means that Ascendas REIT has been paying out dividends at regular intervals continuously for 18 years without fail. You can check a REIT’s dividend history by going to websites such as dividends.sg or to the REIT portfolio directly.

 

2. Strong Sponsor

A sponsor is a company that provides the properties into the initial portfolio of the REIT and may continue to provide more properties for the REIT in the future. Usually, the sponsor owns a significant stake in the REIT. The largest REIT sponsors in Singapore include Mapletree, CapitaLand, and Frasers. A strong sponsor provides the following benefits for the REIT: continue providing profitable properties to the REIT in the future, provide financial support for the REIT in an economic downturn or recession, financing new property acquisition for the REIT. A strong sponsor provides stability and lowers the risk of the REIT.



3. Diversified Tenant Portfolio and High Occupancy Rate

It is important that a REIT collects its rental from a diversified portfolio of tenants to prevent cash flow issues if one tenant defaults on its rent. Furthermore, it is imperative that a REIT has a high occupancy rate (ideally >90%) and positive rental reversions. This ensures that the REIT is able to sustain its dividend payouts consistently. You can check for the REIT’s tenant portfolio and occupancy rate by checking their portfolio directly. Some notable REITs in this category include CapitaMall Trust (98.3%), Ascendas (91%), and Mapletree Industrial Trust (91%).



4. Debt Gearing Ratio

The debt gearing ratio is the ratio of a REIT’s debt against its net total assets. REITs use debt as a leverage to increase its ability to acquire more properties to expand its portfolio and increase its growth speed. Singapore REITs are required by the Monetary Authority of Singapore to limit their debt gearing ratio to 45%. A high debt gearing ratio can be potentially risky as the REITs will be vulnerable to changes in interest rates and economic downturns. It is important to choose a REIT with an appropriate debt gearing ratio (<40%) so that it will not be significantly impacted by changes in interest rates or the overall economy.



5. Dividend Yield

The most important aspect of a REIT is its dividend yield. Dividend yield is calculated by dividend payouts/share price. We would obviously want a REIT with a high dividend yield but it’s important to not fall into the dividend trap. A high dividend yield could be due to the share price declining because there is something fundamentally wrong with the REIT. Any dividend yield above 6% would require a closer look to analyse if there’s anything wrong with the REIT and if the dividend payouts are sustainable in the future. An example is Lippo Mall Trust which currently has a 12% dividend yield. This sounds extremely enticing and almost too good to be true. If we take a closer look at it, its share price has declined from $0.37 to $0.15 over a 5 year period (More than halved over a 5 year period) and its sponsor (Lippo Karawaci) had their credit rating downgraded by 3 different credit rating agencies including Moody’s, Fitch and S&P. There is clearly many things fundamentally wrong with the management of the REIT. This is a classic example of a dividend trap. As a rule of thumb, a good dividend yield to look out for would be around the range of 4-6%.




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