Singapore REITs (S-REITs) had a tepid year in 2021.
The sector underperformed the benchmark Straits Times Index (SGX: ^STI), chalking up a total return of 5.2% against the index’s total return of 13.6%.
This performance may be underwhelming given that movement restrictions have been eased.
Meanwhile, retail REITs have also stopped doling out tenant relief measures and restored their distribution per unit (DPU).
On the other hand, the spectre of interest rate increases by the US Federal Reserve has acted as a dampener for the industry.
Still, there were bright spots among the REITs.
Parkway Life REIT (SGX: C2PU) posted a stellar 32.6% unit price increase in 2021 as the healthcare REIT signed new master lease agreements for its three Singapore hospitals.
Industrial REIT ESR-REIT (SGX: J91U) chalked up a 23.1% gain in its unit price as it gears up for a merger with ARA Logos Logistics Trust (SGX: K2LU).
Elsewhere, Frasers Industrial & Commercial Trust (SGX: BUOU), or FLCT, eked out a 7.8% rise in its unit price last year on the back of rising DPU.
So, what are the attributes to watch out for when sourcing for a winning REIT? Read on to find out.
Occupancy rates
High occupancy rates are a clear sign of demand for the REIT’s properties.
And the pandemic has been the best litmus test as to whether a REIT holds high-quality properties that continue to be highly sought after by tenants.
Investors can scour through a REIT’s earnings filings to review its occupancy throughout 2020 and 2021.
For instance, Mapletree Industrial REIT (SGX: ME8U), or MIT’s, occupancy rate as of 30 September 2020 stood at 92.3%.
A year later, occupancy rate had risen to 93.7%.
Property type
The REIT’s property type also plays an important role in determining if it can continue to grow in 2022.
The earlier examples showed that healthcare and industrial REITs chalked up strong performances last year due to the resilient nature of their properties.
This performance looks set to continue this year as such properties will continue to benefit from the economic recovery.
DPU consistency
The quality of the REIT’s properties will be reflected in the consistency of its DPU.
Parkway Life REIT stands out for its impressive track record of uninterrupted increases in its core DPU since its listing in 2007.
Similarly, MIT also chalked up year on year increases in its DPU without fail since its fiscal year 2012.
Such consistency implies that the REIT must be doing something right, and the trend is likely to continue into this year as well.
Strong sponsor
REITs with strong sponsors are more likely to do well compared to those without such sponsors.
Reputable sponsors not only provide a healthy pipeline of properties that can be injected into the REIT, but can also provide financial support should the REIT fall on tough times.
CapitaLand Integrated Commercial Trust (SGX: C38U) and Ascendas REIT (SGX: A17U) have a strong sponsor in CapitaLand Investment Limited (SGX: 9CI).
Mapletree Investments Pte Ltd is a strong sponsor for MIT and also Mapletree Logistics Trust (SGX: M44U).
And let’s not forget that FLCT also has a strong sponsor in Frasers Property Limited (SGX: TQ5).
Gearing level
A REIT’s growth is dependent on its ability to finance it.
In this vein, a REIT’s gearing level determines the amount of debt headroom it has to borrow for acquisitions that can boost DPU.
A high gearing level implies that the REIT has less wiggle room for debt-fuelled acquisitions, needing to tap on equity markets through preferential offers and private placements instead.
In general, the lower the gearing, the higher the odds are that a REIT can draw on its bank lines to fund a yield-accretive acquisition.
For instance, Parkway Life REIT’s gearing of 34.9% and low cost of debt of just 0.53% gives it ample headroom for more acquisitions to boost its portfolio.
FLCT’s gearing level of 33.7% as of 30 September 2021 gives the REIT a debt headroom of nearly S$2.5 billion for acquisitions.
Meanwhile, newcomer Digital Core REIT (SGX: DCRU), a data centre REIT that recently came to market last December, sports a gearing level of just 27%.
Acquisition pipeline
Finally, investors need to watch for a REIT’s acquisition pipeline.
This point ties back to a REIT having a strong sponsor as such sponsors usually have a ready pipeline of properties that can be injected into the REIT for further portfolio and DPU growth.
Take Keppel DC REIT (SGX: AJBU) for example.
The data centre REIT has a potential pipeline worth more than S$2 billion from its sponsor Keppel T&T, which has granted the REIT a right-of-first-refusal.
Digital Core REIT has an even more impressive pipeline worth around US$15 billion from its sponsor Digital Realty Trust (NYSE: DLR) that can be slowly injected into the REIT.
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Disclaimer: Royston Yang owns shares of Mapletree Industrial Trust, Keppel DC REIT, Digital Core REIT and Frasers Logistics & Commercial Trust.
