Analysing REITS

Reits 30% gearing is excessive....but don't people also take at least 50% mortgage loan when purchasing a house? I mean capital structure would take advantage of the low interest rate. I fear interest rate increases more than level of debt as servicing the debt and reducing dpu would have greater impact to yield and per unit price.

Are Singapore REITs Still Attractive?

26 February 2013

http://www.sharesinv.com/articles/2013/0...ttractive/

Yeoh Mei Kei is a Research Analyst at Fundsupermart.com.

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This a good introduction on Reits (and S-Reits)

http://www.moneysense.gov.sg/understandi...rusts.aspx

A good financial education website as well.

guys may I ask a question.
If interest rates go up to say 3-5%, how much will reits be affected?

(20-03-2013, 02:28 PM)felixleong Wrote: guys may I ask a question.
If interest rates go up to say 3-5%, how much will reits be affected?

Their borrowing costs go up.

Actually it will be worse than that. The underlying levered structure has higher costs, and on a relative valuation to a fixed income instrument the yield needs to go up (price come down).

Personally i think reits at current valuations on a yield basis should only be used for duration matching purpose, ie income against fixed cost of living, expenses etc . Just my 2 c though. Obviously other factors like the valuation potential of the assets in the reit should be considered as well.

Now you start reading of more people warning about the risks of REITs. Why are they doing so?

I suspect it is because everyone is piling in (this includes many, many people I know) and these people are the laymen who are either ignorant of the risks, or are willing to think it is worth bearing.

(20-03-2013, 02:28 PM)felixleong Wrote: guys may I ask a question.
If interest rates go up to say 3-5%, how much will reits be affected?

You can do a sensitivity test. By using an simplified example here

NAV = 100 units
Gearing = 40% = 40 units
Dividend = 6 units

For 1% increase of interest rate, additional finance cost is 0.4 unit, which reduces the dividend to 5.6 units, assuming NPI remain the same.

By using excel, different scenarios on a specific REIT can be easily setup.

Feel free to comment on error.

(20-03-2013, 03:11 PM)CityFarmer Wrote:

(20-03-2013, 02:28 PM)felixleong Wrote: guys may I ask a question.
If interest rates go up to say 3-5%, how much will reits be affected?

You can do a sensitivity test. By using an simplified example here

NAV = 100 units
Gearing = 40% = 40 units
Dividend = 6 units

For 1% increase of interest rate, additional finance cost is 0.4 unit, which reduces the dividend to 5.6 units, assuming NPI remain the same.

By using excel, different scenarios on a specific REIT can be easily setup.

Feel free to comment on error.

For S-Reits (SGX Listed Reits) with underlying assets in Singapore only, like CapitaMall Trust

Income available for distribution (Singapore Assets) = NPI – Finance cost – Other Expenses

For S-Reits with underlying assets overseas, its overseas income are subject to corporate tax rate in the jurisdiction where the assets are located, if there is no special tax treatment for Reits - hence the impact from increase in interest rate would be different. Example: CapitaRetail China Trust (with all assets in China only) would have to pay China corporate tax.

Income available for distribution (Overseas Assets) = (NPI – Finance cost – Other Expenses) x ( 1 – overseas corporate tax rate)

It is a good exercise to go through in comparing the P/L statements of both companies to see the difference.

Feel free to comment on mistakes.

Actually u need to dig deeper to see if the debt is fixed or variable. If only a small amt is variable, they are so called shield from interest shocks. Also chk if the debts are secured or unsecured. Not all debts are equal, check also whether their assets are unemcumbered. No short cut if u want a accurate picture esp if doing risk assessment.

My 2 cents worth

A REIT is also exposed to commercial property cycles - a decline in property valuation will lead to an increase in gearing without even adding a single cent to the total debt ! In other words, 45% gearing in a boom period will not guarantee that the gearing will remain constant in a recession. If one assumes the REIT has $100 worth of assets and $45 worth of debt, the gearing is 45%. If a recession strikes and property valuation tumbles to $90, the gearing is now 45 / 90 = 50% ! If the Trust needs to refinance loans in that period, it might be fairly difficult to do so without injecting new equity.