Analysing REITS

The following 2 publications are a little bit old - nevertheless, some buddies may find them useful.

Global perspectives
2013 REIT report by EY
http://www.ey.com/Publication/vwLUAssets...IT_report/$FILE/Global-perspectives-2013-REIT-report.pdf

The Investment Characteristics and Benefits of Asian REITs for Retail Investors
APREA
Professor Graeme Newell
November 2012
http://www.propertyoz.com.au/library/APR...report.pdf

(14-04-2014, 11:54 AM)Boon Wrote: The following 2 publications are a little bit old - nevertheless, some buddies may find them useful.

Global perspectives
2013 REIT report by EY
http://www.ey.com/Publication/vwLUAssets...IT_report/$FILE/Global-perspectives-2013-REIT-report.pdf

The Investment Characteristics and Benefits of Asian REITs for Retail Investors
APREA
Professor Graeme Newell
November 2012
http://www.propertyoz.com.au/library/APR...report.pdf

Thanks for sharing.

PUBLISHED APRIL 28, 2014
On the corporate governance of REITs
ANDY TAN looks into whether the structure of S-Reits can be streamlined while they continue to retain their tax exempt status

REAL estate investment trusts (REITs) are hot properties. According to the Asia Pacific Real Estate Association, REITs have outperformed the equity and bond markets as an asset class.
From 2011 to 2013, Asian REITs returned 8.2 per cent per annum (measured on the TR/GPR/APREA Composite REIT Index) against a lower equity return of 3.8 per cent (MSCI Asia Equities Index) and even lower bond returns of 2.4 per cent (JPM Government Bond Index). Over a longer 10-year period, Asian REITs also registered higher annual returns of 8.8 per cent compared to 7.6 per cent for equities and 6.3 per cent for bonds.
In Singapore, S-REITs chalked up a total of 13.7 per cent (FTSE ST REIT Index) against the 7.2 per cent for equities (Straits Times Index) for the same three year period.
Notwithstanding the outperformance, there are rumblings on the governance of REITs. To understand why, a short explanation of the unique structure of REITs is in order. Unlike most listed companies, S-REITs are structured as trusts. The assets of a REIT are held by an independent trustee as the legal owner on behalf of unit holders. The trustee is responsible for appointing and overseeing an external REIT manager to manage the assets.
The REIT manager is a separate company, typically compensated with a base fee according to the value of the properties, a performance fee based on gross revenue and/or net property income, and an acquisition/
divestment fee based on the value of the assets. The REIT manager is usually majority-owned or wholly-owned by the sponsor - the property developer or owner of the properties that sold its assets to the REIT in the very first place. This relationship between the REIT manager and the sponsor cuts two ways.
Critics argue that REIT managers have more of an incentive to grow the REIT to increase assets under management and hence the overall level of management fees rather than manage the REIT to maximise unit holder value. They cite governance concerns such as the frequent related party transactions, non-mandatory annual general meetings, lack of transparency on the REIT manager's compensation, and the difficulty of removing a non-performing manager.
The counter argument has been that the sponsor owns a significant proportion of the units and hence its interest is aligned with that of the other unit holders. Indeed, many REITs depend upon their sponsors to continually inject properties to grow the REIT (even if the acquisition/divestment price of the properties may be questioned).
Proponents argue that there are also other safeguards. For example, one third of the directors of the REIT is required to be independent (or half when the chairman is not independent). As a matter of common practice among the REITs, independent financial advisory opinions are generally sought and communicated, and financial transactions and decisions are made based on a yield accretive approach.
Looking back
So, is the outperformance of REITs the result of - or in spite of - the current governance structure? Is the intertwining of sponsors and REIT managers healthy? Or has it just been the REIT industry having tax breaks and being on the right side of the real estate cycle of the last few years?
REITs are relatively young in Singapore. The first S-REIT, CapitalMall Trust, was launched in 2002. A look at the more mature US REIT market might provide an idea of how it could evolve here.
In 1960, the US Congress passed legislation giving REITs tax treatment similar to mutual funds. The early US REITs had a similar structure of external managers - and similar issues - as to what we have today in Singapore. In 1986, legislation was introduced for US REITs to be internally managed and some of the issues of conflict of interest went away. Internally managed REITs have their own officers and employees managing the portfolio of assets.
Kimco Realty, the first internally managed US REIT launched in 1991, became the forerunner for the dominant structure in the US REIT market. In the years since, the US REIT market has grown, consolidated, evolved and matured. Studies of US REITs have found that the percentage of externally managed REITs fell over the years. Today, while a US REIT can choose whether to be internally or externally managed, almost all have chosen the internal option.
Moving forward
Singapore's REIT market will no doubt evolve. With increasing institutional investor interest, coupled with S-REITs looking internationally for growth, the market will mature, consolidate, and eventually adapt to global capital standards.
Yet, I wonder whether we can fast-track the process that took the US 26 years? Is it possible for a REIT to adopt a company structure under the Companies Act but continue to enjoy tax exempt status as long as it complies with the present technical requirements for tax pass-through? In a company structure, the REIT will be governed by its own board and the incentive structure of the internal manager will be better aligned with the interest of unit holders.
Clearly, this streamlining would need to be a multi-agency effort. This effort will be worth it if we can achieve better corporate governance while minimising structural, operational and financial inefficiencies for S-REITs. I believe then that we would be creating more value.
The writer is a member of the Governing Council of the Singapore Institute of Directors
For more articles, go to btd.sg/BMatters

REITs average 7.7% total return in 2014 YTD

Real Estate Investment Trusts (REITs) are a well-established asset class that combine the liquidity and accessibility of stock market investing with the stability and physicality of real estate.
The 26 Real Estate Investment Trusts (REITs) listed on Singapore Exchange (SGX) provide a diverse mix of local and international property assets that house industrial, commercial, retail, residential and specialised tenants. These 26 REITs have averaged a total return of 7.7% in the year-to-date, with the median return at 7.1%. Total returns take both price moves and dividend distributions into account................................................

http://gallery.mailchimp.com/a2dace28363...5b553f.pdf

(12-05-2014, 11:29 PM)Boon Wrote: REITs average 7.7% total return in 2014 YTD

Real Estate Investment Trusts (REITs) are a well-established asset class that combine the liquidity and accessibility of stock market investing with the stability and physicality of real estate.
The 26 Real Estate Investment Trusts (REITs) listed on Singapore Exchange (SGX) provide a diverse mix of local and international property assets that house industrial, commercial, retail, residential and specialised tenants. These 26 REITs have averaged a total return of 7.7% in the year-to-date, with the median return at 7.1%. Total returns take both price moves and dividend distributions into account................................................

http://gallery.mailchimp.com/a2dace28363...5b553f.pdf

The link informs us that the current average yield is 6.4%

" REITs distribute at least 90% of their cash flow income to investors in return for tax concessions from the Singapore government.
The current average indicative yield of the 26 REITs is 6.4%
-
this implies that an investment of S$5,000 would be expected to pay S$320
over a 12 month period. Some REIT dividends have been paid every three months, some have been paid every six months"

This is slightly higher that the 6% approx average yield from HK Reits which do not get any tax concessions from HK Government.

PUBLISHED MAY 21, 2014
Office Reits to outdo industrial: StanChart

By 2016, office Reits are expected to offer higher dividend yields
BYKALPANA RASHIWALA
kalpana@sph.com.sg @KalpanaBT

'Among the SReits, we believe office SReits provide the best growth profile and largest discount to net asset value.'
- Standard Chartered Research
application/pdf iCONSingapore Reits
SINGAPORE's office real estate investment trusts (Reits) are likely to offer higher dividend yields than industrial Reits by 2016, said Standard Chartered Research.
This will be on the back of rising supply of business park space, which will depress rents. Warehouse rents are also predicted to fall.
But the bank is more sanguine about prospects for the Singapore office sector.
In an equity research note yesterday, StanChart issued a call to buy office Singapore Reits (SReits), CapitaCommercial Trust, Suntec Reit and Keppel Reit, with average upside potential of 7-14 per cent to its new price targets, and to sell industrial SReits, Ascendas Reit (A-Reit), Mapletree Industrial Trust (MIT) and Mapletree Logistics Trust (MLT), with average downside potential of 2-15 per cent to its new price targets.
"Among the SReits, we believe office SReits provide the best growth profile and largest discount to net asset value (NAV)," it said.
The three largest industrial SReits trade at 1.2 times price-to-NAV, but the bank expects the average distribution per unit (DPU) to fall at a 3.5 per cent compounded annual growth rate (CAGR) over 2014 to 2016.
"The three largest office SReits trade at 0.9 time price-to-NAV, but we estimate DPU CAGR of 9.6 per cent in 2014-16."
The bank forecast that the three liquid office SReits will offer an average DPU yield of 6.7 per cent in 2016, which would be 14 per cent higher than the three industrial SReits' average DPU yield of 5.9 per cent.
Noting that industrial occupancy rates fell on low demand last year, it predicted that industrial rents will fall 4-7 per cent per annum in 2014-16. A-Reit and MIT reported that their business park occupancy fell to 80 per cent from 92 per cent in 2013, despite overall supply edging up 0.3 per cent. "With supply of business parks rising by 9 per cent per annum in 2014-16E, we now expect rents to fall 22 per cent in this period (from 0 per cent previously). We also expect warehouse rents to fall 14 per cent in 2014-16," the bank said.
Historically, industrial Reits have traded at a price-to-NAV ratio that is 15 per cent higher than the overall sector, potentially due to perceived resilience of such portfolios. "This may no longer hold. In the past three years, A-Reit's weighted average lease expiry has fallen to 3.9 years from 4.7 years and industrial portfolio occupancy has fallen to 88 per cent from 97 per cent. We cut large-cap industrial Reits' price targets by 8 per cent on average. We downgrade MIT and MLT to Underperform from In-Line. Our lowered price targets imply 1.10x P/NAV."
Office Reits are expected to trade up on higher occupancy and rental growth in the next six months. "We believe pre-commitment levels for CapitaGreen could reach 50-80 per cent by end-Q3 2014, from 12 per cent in Q1 2014. We expect prime office rents to rise 40 per cent in 2014-15 on low supply and strong demand. This is 10-20 per cent more bullish than market expectations. In Q1 2014, prime office rents rose 5 per cent quarter-on-quarter."
StanChart expects office supply to grow at just 1.6 per cent per annum in 2014-16, compared with supply growth of 9 per cent per annum for business parks, 4 per cent for multi-user factory space and 5 per cent for warehouses.
"Weak demand conditions in Singapore are symptomatic of a policy-led population slowdown. The government is deliberately allowing the population to grow at 1-2 per cent per annum in the next few years and expects economic growth of 2-4 per cent per annum, resulting in low demand for office and industrial space. In the past 12 months, office SReits' portfolios have shown occupancy gains of 347 basis points (bps), while industrial SReits have shown occupancy declines of 290bps."
It expects office demand to grow at 1.5 per cent per annum, in line with the official policy of slowing workforce growth.
"Our channel checks with HR experts and leasing agents indicate that the curbs could affect business park demand more than office demand. However, if office demand grows even slower than expected, there could be downside to our prime office rent forecasts."

Hello ValueBuddies

I am trying to apply the DCF method to valuing REITs.
Hope to know your thoughts on whether the following approach is reasonable.

For simplicity, I will assume that the REIT will hold all the properties until the end of the lease, after which the properties become valueless and the REIT gets shut down.

So, value of one share = (Cash per share) - (Debt per share) + (Distribution from REIT until property lease expires)

For the last item, I use the following the DCF formula. (Image from investopedia.com)
[Image: DCF.gif]

For the number of years (n):
Since a REIT has multiple properties, each with different number of years left in the lease, I shall use the average remaining lease, weighted by the last property valuation.

For discount rate ®:
Instead of WACC, I am thinking of using the average inflation rate in Singapore.

For CF:
I will use current annualized DPU, and assume a constant growth rate per year.
For growth rate, I check the DPU CAGR of the REIT, and use a conservation figure. For example, if the DPU CAGR is 5%, perhaps I will use 3%.

I am not sure how reliable a DCF model will be in valuing your REIT.

Most of the properties have very long lease term which means your DCF-calculated fair value will be very sensitive to your discount rate.

I will also not do a weighted average for lease term. I will rather map out each different property or only the significant ones while discounting the others to either zero or an arbitrary number for conservatism. Save your effort for the bigger REITs - they already have several analyst covering them. If they still can't predict future earnings, no point wasting your time doing likewise.

Using DPU CAGR, you will still need to make a call on future rental rates. You can smooth the growth out on a cross-cycle rate.

S'pore-listed Reits back in popularity

Goh Eng Yeow
The Straits Times
Monday, Jun 30, 2014

Yield-hungry investors have rekindled their love affair with Singapore real estate investment trusts (S-Reits), as fears over interest rates hikes recede.

Their purchases have enabled the FTSE ST Reit Index to gain as much as 12.5 per cent since early February on the back of Reit prices climbing back to levels last seen 11 months ago.

That in turn helped the index outpace the benchmark Straits Times Index, which has risen 10.5 per cent over the same period. Outperforming stocks in the FTSE ST Reit Index include Suntec Reit, which is up 16.1 per cent, CapitaCommercial Trust, ahead 22 per cent, and Mapletree Commercial Trust, 16.6 per cent higher.

Still, despite the run-up, S-Reits are expected to continue to attract buying interest. Barclays Research noted yesterday that S-Reits have been tracking their United States brethren, which have also been enjoying a good run-up recently. S-Reits are attractive because of their yields.

Barclays noted that they offer an average yield spread of 3.6 percentage points over Singapore government bonds which currently pay investors a yield of 2.4 per cent.

Their yield spreads are also between 1.4 percentage points and 3 percentage points above what Reits in other developed markets are offering, Barclays added. But Barclays is expecting S-Reits to take a breather as US interest rates start to inch up. "Expectations for a firmer global growth recovery and rising US inflation in the second half could mean earlier than expected US rate hikes. Barclays Research now expects US 10-year bond yields to reach 3.4 per cent by mid-2015."

Concerns over the ability of local Reits to refinance their debts also appear to be receding. This had been the bugbear dogging the sector since the dark days of global financial crisis, Fitch's Ratings expects the credit profiles of the S-Reits rates to stay stable over the next 12 to 18 months.

It also noted that most S-Reits' loan-to-value ratios are under 40 per cent, lower than the 60 per cent debt ceiling imposed by the regulators.

S-Reits have also been able to get loans on an unsecured basis. With over 80 per cent of their assets staying unencumbered, this gives them flexibility in refinancing.

One potential dampener is the pressure some Reits may encounter as the supply of floor space outpaces demand and put pressure on rental growth and occupancy rates. But Fitch is confident that most S-Reits will still be able to enjoy "positive lease rental revisions", as the expiring leases for most properties are below market rates.

However, the icing on the cake for investors may be the scope for S-Reits to make use of cheap funding to acquire more assets to boost returns.

DBS Vickers noted in a report last month that "growth remains a key motivator for S-Reit managers". The market would reward S-Reits with stronger growth prospects by giving them higher valuations. As such, it expects those with visible acquisition pipelines to be more active than others. Given the dearth of acquisition opportunities in Singapore, it believes that more Reits would make further inroads overseas.

This article was first published on June 28, 2014

http://business.asiaone.com/news/spore-l...popularity

Hi dzwm87, thanks for the feedback. I tried various discount rate, and indeed the impact is big!
Instead of applying the same discount rate to all REITs, I think I should apply a higher discount rate to more risky REITs, but I can't think of an objective way to decide on the rate to use for each REIT. This makes comparison quite hard...

(30-06-2014, 02:12 PM)dzwm87 Wrote: I am not sure how reliable a DCF model will be in valuing your REIT.

Most of the properties have very long lease term which means your DCF-calculated fair value will be very sensitive to your discount rate.

I will also not do a weighted average for lease term. I will rather map out each different property or only the significant ones while discounting the others to either zero or an arbitrary number for conservatism. Save your effort for the bigger REITs - they already have several analyst covering them. If they still can't predict future earnings, no point wasting your time doing likewise.

Using DPU CAGR, you will still need to make a call on future rental rates. You can smooth the growth out on a cross-cycle rate.