REITs continue to be a source of consistent dividends during good times and bad.
That said, it’s important to distinguish between good REITs and poorly-performing ones.
For a REIT to qualify as a long-term hold, it needs to display certain characteristics.
An example of a strong and well-managed REIT is Mapletree Logistics Trust (SGX: M44U), or MLT.
With interest rates heading higher, the logistics-focused REIT saw its unit price fall 15% recently to a year-low of S$1.58.
Income-focused investors should view such a drop as a great opportunity to accumulate units of the REIT on the cheap.
You may be wondering how you can identify if a REIT is a good one to add to your buy watchlist.
Here are four pointers you need to take note of.
A strong sponsor
A key attribute to look for is the presence of a strong sponsor.
Such a sponsor can not only provide financial support for a REIT in case it runs into trouble, but will also provide it with a steady pipeline of properties for acquisitions.
MLT’s sponsor is Mapletree Investments Pte Ltd (MIPL), a global real estate development and investment firm that owns and manages S$78.7 billion of properties as of 31 March 2022.
MIPL is also the sponsor for industrial REIT Mapletree Industrial Trust (SGX: ME8U), or MIT, and retail cum commercial REIT Mapletree Pan Asia Commercial Trust (SGX: N2IU).
Other reputable sponsors include Frasers Property Limited (SGX: TQ5), or FPL, and CapitaLand Investment Limited (SGX: 9CI), or CLI.
Both FPL and CLI are real estate giants with assets under management of S$40.7 billion as of 31 March 2022 for the former and S$125 billion as of 30 June 2022 for the latter.
Low or moderate gearing level
Another important factor to watch for is a REIT’s gearing level.
The Monetary Authority of Singapore has imposed a maximum regulatory gearing limit of 50% for all REITs.
If a REIT’s leverage is too close to the 50% mark, it will stunt its ability to tap on more debt to acquire and leave it with no option but to undertake equity fundraising.
Frasers Logistics & Commercial Trust (SGX: BUOU), or FLCT, has a gearing ratio of just 29.2% as of 30 June 2022.
The REIT has debt headroom of close to S$2.9 billion to tap on for accretive acquisitions that will increase its distribution per unit (DPU).
Keppel DC REIT (SGX: AJBU), a data centre REIT, sports a gearing ratio of 35.3% as of 30 June 2022, allowing it room to tap on borrowings to purchase more data centres.
Track record of DPU rises
As REIT investors rely on steady distributions as a passive income source, any REIT that has demonstrated a good track record of rising DPU should be on your radar.
MIT has chalked up an impressive track record, with its DPU rising without a pause from S$0.0841 in fiscal 2011/2012 to S$0.138 in fiscal 2021/2022.
Healthcare REIT Parkway Life REIT (SGX: C2PU) can boast a similar streak.
Its core DPU has risen without fail every year, going from S$0.0683 in fiscal 2008 to S$0.1408 in fiscal 2021.
Investors can deduce that these REITs must be doing something right to see uninterrupted increases in their DPU over such a long stretch.
A healthy acquisition pipeline
Finally, a fourth attribute to watch for is the presence of a healthy acquisition pipeline.
REITs grow using a variety of methods that include acquisitions and organic growth (i.e. asset enhancement initiatives and positive rental reversions).
If a REIT’s sponsor does not have a ready pipeline of properties to inject into the REIT, the REIT manager may take more effort in locating a suitable acquisition to boost DPU.
On this note, Keppel DC REIT has identified more than S$2 billion worth of acquisitions from its sponsor’s subsidiary and private data centre funds.
Daiwa House Logistics Trust (SGX: DHLU), a Japan-focused logistics REIT, has identified suitable pipeline assets in both Japan and Southeast Asia that can be acquired from its sponsor Daiwa House Industry Co Ltd (TYO: 1925).
These two examples provide a good showcase of how a REIT can prepare to acquire assets once the sponsor stabilises and readies the property for injection into the REIT.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
Disclaimer: Royston Yang owns shares of Mapletree Industrial Trust, Keppel DC REIT, Digital Core REIT and Frasers Logistics & Commercial Trust.