Thursday, September 26, 2013

Things to note when investing in Reits

There are thousand and one things to note when investing in Reits, in fact, the most you know, the better it is, but I felt there are a few pointers that not really emphasized.

1) Fees structures

Reits earn three fees; base management fees, performance fees, and acquisition fees. Most reits have similar base management fees, but the performance benchmark and acquistion fees can be quite significantly different. CIT has a benchmark to beat, Soilbuild and Sabana pay performance fees when DPU is higher than preceding year, but Sabana has a additional requirement of 10% better DPU, before performance is given.

We need to understand that many companies spin off their assets into Reits for capital recycling or capital gains. No companies spin off the assets into Reits purely for unitholders. So there might be times when the parent companies' benefits are considered before unit holders. We are not asking parent company to inject assets are firesale price, but I think they should be fair to reits unitholders in terms of yield, and here we come to the second point.

2) Yield of acquisitions.

We always hear the term, yield accretive acquisition, but it is important to know about the actual yield of acquisition.  A 4% yield acquisition will increase DPU in a low-interest environment that we have now, but what happen when the "norm" of 3 percent interest returns? Of course, if the acquisition is financed not by loans but by placements and rights, maybe the drawback of  low yield acquisitions is not so significant, but you will suffer from dilution then.

Size of discounts for rights or placements 

Usually rights or placements are issued at a discount to prevailing price, that is acceptable, as long as the acquisition is yield accretive. But companies with weak sponsors might need a bigger discount, so the strength or the reputation of sponsor play a part too. 

3) Loans (Don't just look at effective interest rate)

Look at the prudence of capital management as a whole and not just effective interest rates, the interest rate just tell part of the story. e.g. The reason why a reits have a low cost of interest could be because the company had a lot of short term, secured, floating rates loans. Also, look at the spread of the loans and the years, usually the wider and more equal the spread over the longer period, the better. Look also at the type of the loans; fixed/floated, tenure, secured/unsecured. When you compare between reits, make sure you are comparing apples with apples.

4) Familiarity of Assets

There are countless reits with overseas assets, I think it is important to read up on the type of lease of assets eg. religare trust has hospital build on land with pending lawsuit. , and since we might not be able to pop by and see for ourselves how the assets are doing, make sure the returns are worth the risk you are taking.

5) rent psf, build-in rental revision 

We usually just look at Gross rent or NPI, but calculating a bit deeper can tell a lot about the pricing power of the properties, or the reit manager, and better for comparisons. If you also tell you about whether to be conservative or aggressive when rental is for for revision. 

Hope these help

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