In assessing the viability of an REIT, do analyse ‘Group’ financial statements since it is more comprehensive.
- Revenues (income, that is % of Net Lettable Area × average rental per square foot) should, at minimum, keep pace with inflation rates
- Net Property Income (NPI) Ratio [(Gross Revenue – total expenses)/Gross Revenue] = benchmark basis for ‘operating efficiency’ between REITs of corresponding nature (like for like)
- Property Yield (the ‘fundamental attractiveness’ of a REIT) = NPI/Property Value
- Interest Cover (Interest Cost/Earnings before Interest, Taxes, Depreciation and Amortisation): For REITs with fluctuating cashflows (such as hospitality), they should ideally have this at more than 3 (times) to be considered favourable to invest in
The other portion that truly captured my attention was on funding. A ‘safer’ REIT would have:
- Debt with spread out maturity payment dates (prevents to my understanding insolvency)
- Manageable leverage ratios
- Manageable total (all-in) interest costs, that is including bonds or Medium Term Notes [potential of higher refinancing costs in higher interest rate conditions]; does the REIT re-borrow (refinance) in low interest rate environments?
- Unencumbered assets (not pledged as collateral) to sell or mortgage to repay debts
- Varied funding avenues at sustainable costs. Such channels include:
- Medium Term Notes (MTN): ‘best efforts’, sold often to institutions and high-net worth persons. This format allows the REIT to cumulatively raise capital. It is especially favourable when interest rates are low and markets are willing to ‘lend’ to the REITs
- Placement (new units to other third party buyers) or Rights (units sold to existing shareholders): this involves creating more units to inject capital – there are pros and cons to this method…