What are some important performance or financial metrics that you scrutinize when investing in REITs?
While factors such as asset quality, location, and property use are all important details, to truly master REIT investing requires investors to delve deeper into other critical performance metrics.
As a industry norm, REITs normally abide by certain reporting standards. This makes it easier for investors to understand how their investments are faring, and to allow comparisons with other REITs.
But unless you are a seasoned property investor with the relevant knowledge, many of the terms used might seem quite alien to you.
In this article we’ll like to share with readers 4 performance metrics which are commonly mentioned in financial reports concerning REITs.
Equipped with this knowledge, we believe readers will be in a better position to make more informed decisions when it comes to investing in this asset class.
Cost Of Debt
The business model of REITs requires them to purchase and maintain commercial properties through large loans from other financial entities.
Following which, management has to strike a balance between paying dividends to investors, and paying off interest payments on their loans.
However debt is never given freely, and involves a certain interest rate which is determined by a variety of factors such as loan tenure, repayment terms, and issuer quality.
This is where the Cost of Debt comes in. A REIT able to maintain a low cost of debt would be in a better position to pay dividends to investors, and manage it’s debt payments as well.
This measure can also give investors an idea of the perceived risk of a REIT compared to others, as riskier companies generally have a higher cost of debt.
Among the REITs in Singapore, Lendlease REIT has one of the lowest costs of debt at 0.90% per annum. This is mostly because of it’s low gearing ratio and reliance on floating rate interest payments to keep the cost of debt low.
The concept of Interest Coverage ties in with the cost of debt. It can be described as a representation of how many times the REIT can pay its interest obligations using its current income.
The lower the Interest Coverage ratio, the more the REIT is burdened by it’s debt expenses. This prevents it from freeing up capital for other ventures such as asset enhancements and potential acquisitions.
It’s important that management keeps this ratio at a certain level as a lower ratio could signal potential financial troubles with the REIT.
This in turn could cause the market’s perception of the REIT to turn sour, affecting the share price negatively.
Keppel DC REIT has one of the highest Interest Coverage ratios at 12.2 times earnings. This can be attributed to it’s relatively low cost of debt and leverage ratio.
This metric indicates the relative rise and fall in prices of new rental leases for the REIT. A positive reversion rate typically denotes the signing of new leases at higher prices than before.
Rental Reversion rates are often considered a bellwether for market trends, and supply-demand dynamics.
Clearly, a strong reversion trend demonstrates the strong demand for the REIT’s properties, while a weak or negative reversion rate could spell trouble for investors.
A point to note is that rental reversion rates can also be affected by certain lease-types, such as step-up leases which charge higher rates for longer tenures.
Recently, Ascendas REIT has reported above average reversion rates of 3.7% for it’s global portfolio for 3Q 2021.
With such encouraging metrics, it’s no wonder that the REIT’s stock has managed to hold it’s own value well throughout the pandemic.
Ultimately, a REIT’s business model depends heavily on it’s ability to attract and maintain tenants for it’s properties.
To this end, the Weighted Average Lease Expiry or WALE can help to display the REIT’s vacancy risk by measuring the average period in which all leases in a REIT’s portfolio will expire.
This allows investors to have visibility on the REIT’s future income streams and possibly the tenant profiles as well. For tenants with longer leases tend to be more stable in nature.
A REIT’s WALE is usually measured by using one of two commonly accepted metrics, which are the Net Leasable Area (NLA), or Gross Rental Income (GRI).
Using the NLA places more emphasis on the occupied space of it’s respective tenants, while the GRI causes the WALE to be tilted towards the rental income instead.
Having a long WALE can be seen as a positive for REITs in Singapore. One of these is Keppel REIT, which boasts a WALE of 6.1 years, with their top 10 tenants providing a even longer WALE of 10.8 years.
Such metrics clearly display the resilience of the REIT, and ensures a steady stream of distributions in the foreseeable future.
It can get tricky at times; investing in REITs requires investors to understand concepts and terminology in both equity and property investing.
However, investors should not be deterred by such obstacles as it really isn’t as difficult to understand as some proclaim it to be.
Rather we should continue to build up our own knowledge in this asset class so as to level the playing field and make better decisions when investing in REITs.