How to Pick a REIT for Sustainable Dividends

My ex-colleague at the Motley Fool Singapore, Ser Jing, once wrote that “The next best thing from being a property owner yourself, is to own real estate investment trusts, or REITs”.

It turns out that Ser Jing is in good company with that sentiment.

Author Bobby Jayaraman, in his book “Building Wealth Through REITs”, shared that there are a few advantages to owning REIT shares.

Being a shareholder of a REIT gives you partial ownership of the real estate that it owns.

Having partial ownership also entitles you to the dividend distribution which typically happens every quarter.

As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of their profits as dividends in order to enjoy tax transparency.

The advantages of REITs include access to diversified properties, better liquidity, and the relatively low capital outlay to own pieces of property.

However, does this mean that we just go ahead and buy any REIT that comes along?

Businesses, not tickers

As Smart Investors, we look at shares as businesses and not just as tickers symbols.

It follows that we should always do our homework to ensure that the dividend yield offered by a REIT is sustainable, and is able to grow over the long term.

To this, author Bobby Jayaraman had a few suggestions to share in his book. Below are three things that you might want to look out for in a REIT.

Net property income or NPI

Mr. Jayaraman shared that the NPI is a very important number as it signifies the earnings power of a property.

The NPI is defined as the gross rental revenue of a property minus all related expenses.

The attractiveness of a REIT hinges on the strength and sustainability of the NPI.

To quote an example, the NPI for Mapletree Industrial Trust (SGX: ME8U), or MIT, for the financial year ended 31 March 2016 (FY2016) was $245.1 million.

Fast forward five financial years, and the REIT managed to grow its NPI to $351 million for FY2021.

This sizable uptick in NPI may have resulted in the share price for MIT increasing by around 72.5% from S$1.60 on 10 June 2016 to S$2.76 on 9 June 2021.

The underlying business and its sector

In his book, REITs were broadly categorized into retail, hospitality, healthcare, industrial, and cross-border.

As it is with different business sectors, each REIT sector above is unique and can be influenced by different factors.

As such, understanding the different considerations of each category is a key part of understanding the REIT itself.

For instance, industrial REITs such as Frasers Logistics & Industrial Trust (SGX: BUOU), or Mapletree Logistics Trust (SGX: M44U) may be more sensitive to economic fluctuations in the manufacturing sector, or the logistics sector.

On the other hand, healthcare REITs such as Parkway Life REIT (SGX: C2PU) may show more resilience during recessions as healthcare is often seen as a non-discretionary expense.

Track record in funding

For Mr. Jayaraman, the sources and types of financing that the REIT has is a critical area to look into.

A variety of funding possibilities gives a REIT flexibility to thrive in different market environments.

Besides that, the leverage and debt profile of the company also provides clues on the sustainability of a REIT in different interest rate environments.

For instance, Mapletree Commercial Trust (SGX: N2IU), or MCT, has 70.7% of its borrowings fixed interest rates as of 31 March 2021.

By locking in its rates, the REIT is less vulnerable to interest rate changes in the near future.

On top of that, 100% of its debt was also unsecured, therefore there is a possibility that the REIT is able to pledge its properties in times of weak credit markets to gain further financing.

Investors also need to observe the level of interest rates that the REIT is able to secure when it refinances its debt.

In MCT’s case, the REIT has shown its ability to lower its weighted all-in cost of debt from 2.94% a year ago to the current 2.48%.

Get Smart: Selecting the right attributes

The most attractive feature of a REIT is the relatively high dividend yield it offers to unitholders.

Smart Investors, though, would do well to perform their own homework in determining whether or not the dividend yield offered is sustainable.

As it is with any other business, the track record of the management team matters when it comes to creating value for the REIT.

The pointers above serve as general guidelines when evaluating REITs.

Moving forward, you might want to study your chosen REIT over time to gain more knowledge on it before committing your money.

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Disclaimer: Royston Yang owns shares of Frasers Logistics & Commercial Trust.

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