A REIT’s Wellbeing – Building wealth through REITs (2014)

A continuation of the previous post… (related likewise to the post on one CMT annual report)

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…

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