Friday, March 22, 2019

Uncommon Financial Metrics of REITs

Previously, I've shared bout Basic Financial Metrics of REITs. This time, I would like to share a few uncommon financial metrics that value against distribution. The reason being is, as a REIT investor, ultimately we are focusing on dividend.

In case you ask, I have not done any back test on these metrics.
1) Distribution over Management Fee
Formula: Distribution to Unitholders / (Manager's Base Fee + Performance Fee)

This measure how much dividend received for every dollar of management fee paid, the higher the value the better. You could compare whether a REIT manager is charging a high or reasonable fee for the dividend generated from properties that they manage. Refer below table for top 5 and bottom 5 based on latest 4 quarters:
Top 5
Distribution over Management Fee
Bottom 5
Distribution over Management Fee
Name
Approx. Value
Name
Approx. Value
Cromwell European REIT
20.25
Keppel REIT
3.75
Capitaland Commercial Trust
16.75
Dasin Retail Trust*
4.75
Manulife US REIT
10
Lippo Malls Indonesia Retail Trust
5
Sasseur REIT
10
Mapletree Logistics Trust
5.25
Soilbuild Business Space REIT
10
Ascendas India Trust*
5.5
* Both Dasin Retail Trust & Ascendas India Trust are business trusts

2) Distribution over Capital
Formula: Distribution to Unitholders / (Equity + Debt)
Equity to include net asset value attribute to unitholders + perpetual securities holders + preferred stock holders

This is a modified metrics of  return on capital (ROC), we replace return with distribution. This measure the effectiveness of REIT in using capitals to generate distribution. Refer below table for top 5 and bottom 5 based on latest 4 quarters:
Top 5 Distribution over Capital
Bottom 5 Distribution over Capital
Name
Approx. Value
Name
Approx. Value
Mapletree Industrial Trust
5.5
Dasin Retail Trust*
1.6
Sasseur REIT
5.4
OUE Commercial Trust
2.1
Frasers Logistics & Industrial Trust
5.1
Fortune REIT
2.4
First REIT
5
Keppel REIT
2.5
Keppel DC REIT
4.8
Far East Hospitality Trust
2.9
* Dasin Retail Trust is a business trust

3) Distribution over Gross Income (Distribution Margin)
Formula: Distribution to Unitholders / (Gross Revenue from Properties + Distributions from Associate/Joint Venture + Interest Income + Any Recurring Gain)

This measure the capability of REIT in managing its income and expense. The higher the value, the better the operational efficiency the REIT is. A low figure indicates that either the REIT expenses is high or income is low. This figure would be slightly affected if the REIT retain earning for capital use. It would also affected if REITs choose to receive management fees in units instead of cash. Refer below table for top 5 and bottom 5 based on latest 4 quarters:
Top 5 Distribution Margin
Bottom 5 Distribution Margin
Name
Approx. Value
Name
Approx. Value
OUE Hospitality Trust
70
Lippo Malls Indonesia Retail Trust
25
Parkway Life REIT
70
BHG Retail REIT
27.5
SPH REIT
67.5
Dasin Retail Trust*
30
Far East Hospitality Trust
67.5
Ascott Residence Trust
30
IREIT Global
65
Ascendas Hospitality Trust
35
* Dasin Retail Trust is a business trust

4) Income Support over Distribution
Income support is also known as rental support, it refers to the income that top-up by sponsors or properties seller in the event when actual rental income is lower than desired rental income. Besides rental top-up, income support can also be done through certain shareholders not taking any dividends, in which employed by BHG Retail REIT & Dasin Retail Trust.
BHG Retail REIT
Dasin Retail Trust
I measure income support against distribution to check the % of distribution contributed by income support. Refer below list for counters that have income support:
Income Support / Distribution
Name
Approx. %
Ascendas REIT
13.25% (Est.)
BHG Retail REIT
14.25%
Dasin Retail Trust*
44.25%
Keppel REIT
4.5%
Lippo Mall Indonesia Retail Trust
4%
OUE Commercial Trust
18.25%
Sasseur REIT
18.25% (Est.)
* Dasin Retail Trust is a business trust

Ascendas REIT value is estimated from latest financial statement below, since no detail information on income support, so assume full value as income support:
Sasseur REIT value is estimated from information extracted from IPO prospectus below, took the period of 2018.

If you read through carefully, you would notice the below:
i) Dasin Retail Trust appeared 4 times
ii) Keppel REIT appeared 3 times
iii) Lippo Mall Indonesia Retail Trust appeared 3 times
*Note that this is a buy or sell recommendation.

Again,besides the above uncommon metrics, do check the basic financial metricslease profiledebt profilediversification profile as well. Take note on income support as always. If you want to create a REIT screener, you could always refer to How to Create Your Own Basic REITs Screener.

Friday, March 15, 2019

Basic Financial Metrics of REITs

For this post, I would like to share some basic financial metrics of REITs, there will be some repetitive metrics from debt profile of REITs. All the information below can be extracted from REITs quarter presentation slide and quarter financial report.
1) Distribution per Unit (DPU)  & Dividend Yield
DPU = Distribution / Outstanding Shares
Dividend Yield = DPU / Share Price x 100%

DPU is the dividend (in dollar) that investor will receive for every number of share owned. Dividend yield is the dividend % that investor would receive for every $1 of share price. Dividend yield is generally calculated using trailing twelve months (TTM) dividend. For those counters which are less than 12 months, one could annualized the DPU to have a more accurate dividend yield. Dividend yield can be calculated base on your average share price (a.k.a. cost) or base on market price.
Again, do not buy solely based on dividend yield
2) Net Asset Value (NAV) & Price over NAV (P/NAV)
NAV = Total Assets - Total Liabilities.
NAV per unit = NAV / Outstanding Shares
P/NAV = Share Price / NAV per unit

NAV is the also known as book value or equity portion under balance sheet. Therefore, P/NAV also known as price to book ratio (P/B ratio). In simple term, if this value is less than 1, mean you can buy it by paying less than its net asset and vice versa for more than 1.

For NAV presentation, there are minor inconsistency between each REIT. Some would calculate NAV by using issued unit while some using issued unit + issuable units. There are also some show NAV which exclude dividend in theirs quarter presentation slides. Although the difference is not really big, but I would recommend do maintain data consistency by manually calculate NAV per unit by yourself. Let's see below for different NAV presentation from Frasers family:
Frasers Commercial Trust - NAV exclude dividend 
Frasers Hospitality Trust - NAV based on issued unit
Frasers Centrepoint Trust - NAV based on issued and issuable units
3) Property Yield (Cap Rate)
i) Without Joint Venture or Associate
Property Yield = Net Property Income / Properties Valuation
ii) With Joint Venture or Associate
Property Yield = Net Property Income + Distribution from Joint Venture and Associate / Property Valuation + Interest in Joint Venture and Associate

This value indicate the earning power of REITs portfolio, the higher the value the better. However, since properties valuation is generally high in prime area, therefore property yield would be lower. As per previously mentioned in lease profile of REITs, some hospitality REITs classify some of their properties under property, plant and equipment instead of investment properties. So when calculate property yield, do remember to add those value back.

If a REIT has interests in associate or joint venture, then they would receive distribution from joint venture or associate from time to time, which you could find this information in cash flow statement under investing activities. For this case, you would have to use the 2nd formula.

4) Gearing Ratio & Interest Cover Ratio
Gearing ratio = total debts / total assets. Monetary Authority of Singapore (MAS) impost a 45% gearing limit on REITs.

There are few methods to calculate interest coverage ratio:
i) EBIT / Interest Expense
ii) EBITDA / Interest Expense
iii) NPI / Interest Expense

For more detail explanation of both, you could refer debt profile of REITs.
When assessing above financial metrics for REITs, do check their lease profiledebt profilediversification profile as well. Especially take note for REITs with income support because of DPU might be affected upon expiry of income support. You could refer How to Create Your Own Basic REITs Screener to customize your own REITs Screener.

Friday, March 8, 2019

Diversification Profile of REITs

This is continuous post after debt profile and lease profile of REITs. REITs diversification is a process to reduce risk by investing in multiple income generating sources. Often it is more of qualitative factor in analysis, so how can we measure it? Personally, I quantify it through top income contribution from various sources, the smaller the value, the better.
Don't put all your eggs into one basket
1) Major Sector Contribution
Some REITs manage properties from different sectors, you could refer to Sector Contribution Weightage of REITs that I've post previously for more detail. Major sector contribution refers to the biggest sector income contribution for a REIT. How you classify REIT sector would affect this figure, if you classify REIT sectors as per my previous post, then you could take the figure from the shared google sheet as reference, just remember to update it every quarter.

2) Top Geographical Location Contribution
This is another subjective figure, different person would have different view. Below is simplified table for how I classify:
Properties in
Single State
Properties in
Multiple States
Properties in
Single Country
Not Diversified
Diversified
Properties in
Multiple Countries
Diversified

Even if a REIT has only properties in 1 country but in different states, I would considered this as diversification as well. For examples, IREIT Global only has properties in Germany, but I would take its top geographical location contribution as around 34% (from Berlin property). Refer below for REITs top geographical contrition (by gross revenue income) ≤ 40% and 100%.
Top Geographical Contribution ≤ 40%
Top Geographical Contribution = 100%
Name
Approx. Contribution
Name
Contribution
Ascendas Hospitality Trust
37.5%
Dasin Retail Trust*
100%
Ascott Residence Trust
20%
ESR-REIT
100%
Cromwell European REIT
30%
Far East Hospitality Trust
100%
First REIT
35%
Fortune REIT
100%
Frasers Hospitality Trust
20%
Mapletree Commercial Trust
100%
Frasers Logistics & Industrial Trust
25%
OUE Hospitality Trust
100%
IREIT Global
35%
Sabana Shari'ah Compliant Industrial REIT
100%
Manulife REIT
22.5%
SPH REIT
100%
Mapletree Logistics Trust
37.5%


* Dasin Retail Trust is Business Trust instead of REIT. Note that this table is only for reference as it is based on the above classification. You would have different result if you consider 1 country as 1 geographical location.
Geographical diversification come with foreign exchange risk even if hedging is in place
3) Top Property Contribution
This is to check whether a REIT is heavily depends on its flagship property for income. Refer below table for REITs top property contrition (by gross revenue income) ≤ 10% and ≥ 50%:
Top Property Contribution ≤ 10%
Top Property Contribution ≥ 50%
Name
Approx. Contribution
Name
Approx. Contribution
Ascendas REIT
5%
BHG Retail REIT
60%
Ascott Residence Trust
10%
Mapletree North Asia Commercial Trust
62.5%
CDL Hospitality Trusts
10% 
OUE Hospitality Trust
55%
Frasers Logistrics & Industrial Trust
10%
SPH REIT
77.5%
Mapletree Logistics Trust
5%
Suntec REIT
55%

4) Top Tenant Contribution & Top 10 Tenants Contribution
Similar to top property contribution, this is to check whether a REIT is heavily depends on its top tenant and top 10 tenants for income. Refer below for REITs top tenant and top 10 tenants contribution (by gross revenue income) highlight:

i) Top Tenant Contribution
Top Tenant Contribution ≤ 5%
Top Tenant Contribution ≥ 50%
Name
Approx. Contribution
Name
Approx. Contribution
Ascendas REIT
4.5%
Ascendas Hospitality Trust
60%
Capitaland Mall Trust
3.25%
First REIT
82.5%
ESR-REIT
4.5%
IREIT Global
52.5%
Frasers Centrepoint Trust
4.25%
OUE Hospitality Trust
57.5%
Keppel-KBS US REIT
3.25%
Parkway Life REIT
60%
Mapletree Commercial Trust
3.75%
Suntec REIT
4.5%

ii) Top 10 Tenants Contribution
Top 10 Tenants Contribution 25%
Top 10 Tenants Contribution 90%
Name
Approx. Contribution
Name
Approx. Contribution
Ascendas REIT
20%
Ascendas Hospitality Trust
97.5%
Capitaland Mall Trust
20%
CDL Hospitality Trusts
95%
Frasers Centrepoint Trust
22.5%
EC World REIT
100%
Keppel-KBS REIT
20%
First REIT
100%
Mapletree Commercial Trust
25%
Frasers Hospitality Trust
92.5%
Sasseur REIT
17.5%
IREIT Global
100%
SPH REIT
22.5%
Parkway Life REIT
90%
Suntec REIT
22.5%


For hospitality and healthcare REIT, due to the lease structure of master lease, both sectors are heavily rely on small numbers of tenants for income. Note that for Far East Hospitality Trust, 100% of its master lessees are members of Far East Organization Group. For CDL hospitality trusts, around 60% gross income from master lessees are members of sponsors. As for Acott Residence Trust, no information is provided on tenant contribution.

5) Top Tenant Trade Contribution
This is the tricky one, not all REITs disclose this information in detail and classification is not standardized. Therefore, I find it difficult to compare and I do not consider this during my analysis. This is also not applicable to healthcare and hospitality sector. Refer below for some examples of non-standardized information presentation:
Frasers Logistics & Industrial Trust
Ascendas REIT
Sabana REIT
Soilbuild Business Space REIT
From the above, you could see that the classification is different and information is not always available. If you really would like to compare, you may have to create your own classification for each REIT sector.

For all the contribution above, whenever possible, I would take weightage by gross rental income than net property income or property valuations. Information can be found mostly from presentation, financial statement (under Segmental Revenue and Results) or annual report, thought some would require manual calculation. I hope the above provide some ideas for you to measure diversification.