This article was written in partnership with Shareinvestor WebPro, an essential investment tool for investors. All views expressed in the article are the independent opinion of Value Invest Asia and do not in any way reflect the views, opinions, or endorsements of ShareInvestor Pte. Ltd. 

Most stock markets around the world are in a mess now. The Straits Times Index has collapsed more than 25% since the beginning of the year.

Source: Shareinvestor.com Webpro – Straits Times Index (till 3rd April 2020)

We know that sectors like tourism or airlines are badly affected by the current COVID-19 pandemic. However, another sector that is seeing a grave outlook is the Real Estate Investment Trust (REIT) sector.

Source: Shareinvestor.com Webpro – SGX S-REIT Index (till 3rd April 2020)

The SGX S-REIT Index has taken a 34% from its peak in January, much more than the general market. With the spread of COVID-19 increasing, Singapore is tightening up its control to fight off the virus. Starting 7th April 2020, Singapore is closing most workplaces except for essential services for a month. That means that many brick and mortar businesses would be closed, increasing the pressure for the tenants. 

With no tourists, no shoppers and no business, property owners like REITs would be under extreme pressure. Some of the REITs in Singapore might also face short-term liquidity problems. This is because all REITs have to finance their properties with bonds or loans. Some of these loans might be reaching maturity and would need to be refinanced. However, if the REIT is unable to refinance these loans when the time comes, they would face a liquidity crunch similar to what we experienced during the global financial crisis in 2008.

That is why if you are planning to invest in a REIT right now, it is important for you to choose carefully. You need to select REITs with strong balance sheets to reduce the chances of them facing solvency issues.

This Too Shall Pass

However, the good news is the crisis will pass. As China has shown, the virus can be contained. China first discovered the virus back in Dec 2019. Through many drastic measures, they were able to contain it by March this year. This means that the virus can be defeated and most of the challenges we are facing now might be temporary. 

Thus, investors should be positioning ourselves for the recovery soon. After the health pandemic dies down, tourists will return, the hotels will recover and the malls will reopen. However, there are still big risks for investors when investing in REITs now. Most importantly, we have to ensure that the REITs we invested in can survive till the recovery. If they run out of cash before then, the REIT might still collapse, destroying our investment. For example, Eagle Hospitality Trust (SGX:EHT), a trust with 18 hotels in the United States, has suspended its trading and is facing a very serious financial situation. The sponsor claims the current problem is due to the COVID-19 pandemic. 

How to Invest Safely?

So how can we find the best REIT to invest in that is both safe and can benefit from the recovery? A good way is using screens. This ensures that we narrow down our search, improving our chances of finding good REITs and reducing the chances of falling into a risky REIT. This is how I do it.

For a REIT, I am concerned with 4 key factors. 

#1 Stable Distribution

I want a REIT with consistent and growing distribution over the past few years. This shows me that the REIT is able to improve its properties’ yield and reward investors. It could also help me screen out REITs with tenancy risks, where a few key tenants might be contributing too much to its rental. And when these tenants move out, there will be a huge drop in its rental income. Therefore, I would like to find a REIT that has shown that it can maintain its yield in a consistent manner.

#2 Low Payout Ratio

However, I want to make sure that it is not inflating its distribution by paying out more than what it is earning. This means that its payout ratio should not rise above its earnings. 

Payout Ratio (%) = Distribution per share  Earnings per share

If the REIT has a payout ratio consistently below 100%, it gives me more confidence that the distribution is more sustainable.

#3 Low Debt

In Singapore there is a leverage limit of 45% when it comes to REITs. Leverage ratio can be calculated by dividing the REITs’ debt to its total property value. Yet, I like to be more conservative than that. Typically, I would look for REITs by looking at its net debt to equity ratio.

Net Debt to Equity = (Debt – Cash in Hand) Equity

I prefer when a REIT has a net debt to equity of less than 60%, meaning that it is able to finance most of the property with unitholders’ equity. This is important because debt is the key risk that might drive a REIT into a liquidity crisis. Thus, we would want it lower than normal.

#4 Valuation

After making sure that the REIT meets the first three factors, we can then think about the valuation of the REIT. There are many ways to value a REIT. Common methods include using valuation ratios like Price-to-Book or Price-to-Earnings Ratios. 

However, I see REITs mostly as an income stock, the most important valuation method to me would be the distribution yield I would be enjoying. There is no scientific way to accurately measure the valuation of a REIT. Thus, I would want to invest in REITs only when they offer me a better yield compared to government bonds or high-quality corporate bonds.

Estimated Bond Yield

Singapore Government Bonds: 1.25% to 2.00%

High-Quality Corporate Bonds: 2.5% to 4%

Therefore, logically, I would only consider investing in a REIT if it is offering more than that. You can decide what yield is attractive to you but I would choose a yield of at least 5% in this case.

Putting it All Together

We can put it all together using a screener. WebPro has such a valuable function, and this is how I use it.

Using the Market Screener function, I will add in the 4 factors.

Source: Shareinvestor WebPro

To recap, we want a REIT with:

  1. A growing distribution
  2. A low payout ratio
  3. A low debt ratio
  4. An attractive valuation

Source: Shareinvestor WebPro

I am not saying that all these three REITs will be great, but a screen like this can help us narrow down my search for a REIT that is less risky and could benefit from future recovery. I do not need to search through every single REITs in the market to access these factors manually. From the WebPro function, it showed me instantly that three REITs meet my criteria. This means that I can just focus my time and energy researching on these three REITs and find the one that I am comfortable with.

By clicking through each REIT, I can see their financial and ratio analysis. I can view their financial data for up to ten years, giving me a clearer picture of how well the REITs have been performing through different business cycles.

Source: Shareinvestor WebPro 

On top of that, using the Stocks Comparison function, I can line the three REITs together and compare them side by side.

Source: Shareinvestor WebPro 

I can easily compare their valuation, growth, debt level and past performance all within the same page. For example, I can see that although Mapletree Industrial Trust has been the best performer over the past 5 years, it is also trading at the highest valuation now. And from these data, I can make better decisions on my investment. 

And that is how we can all hunt for the best S-REIT in 2020! Happy hunting.

This report is produced in partnership with Shareinvestor WebPro. You can get started with Shareinvestor WebPro/Station subscription today! Click here to get started. For all new member, you can also enjoy $30 off your first year simply by keying in the promo code: SGVIA30OFF

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