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.

4 comments:

  1. Using net income will be clearer and direct? As compared to gross income

    ReplyDelete
    Replies
    1. You could use either particular gross revenue over total gross revenue or particular NPI over total NPI. Most REITs provide information on gross revenue basis instead of NPI, so it would be easier to use gross revenue for apple to apple comparison.

      As for to compare net income before or after tax would be quite difficult. As there are common expenses like management fee, interest expense, tax etc which are tie to overall operation instead of individual sector, geographical, property or tenant.

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  2. I am for diversification when it comes to investment ..Beside my SGX portfolio, I have created an overseas portfolio as one can get better yield , more regular monthly payout and there is a lot more financial instruments listed in larger exchange from NY and London that are better than what we have available in SGX.

    ReplyDelete
    Replies
    1. Hi, I just view through your blog, very amazing portfolio you having. Why don't you consider to add your blog to thefinance.sg and www.sginvestbloggers.com so more people can learn from you ?

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