Analysing REITS

[corydorus]

Hi corydorus and Fish Head, thanks for the feedback.

taking the entire lease term is too long. There are too many varieties that make the calculation with little meaning. Why not just take 10 year as a reference.

I use yield, interest coverage, gearing and NPI to make my decision for REITS. but also try to determinate the value qualitatively, like the population around the area, potential competition and etc.

You have a point. But if I take only 10 years of dividend, I need to somehow estimate the value of the properties at the end of 10 years.
Not sure how I can do that

It is true that qualitative analysis is equally important.
I try to first screen the REITs using some metrics that can be mechanically calculated.
After that, I can do more qualitative study into the shortlisted REITs with favorable metrics.
Was hoping to incorporate DCF into one of the metrics, but after looking at the replies here, I think it is harder than I thought.

I mainly look at the following:
- Yield, compared to historical average
- Yield spread vs 10 year SGS, compared to historical average
- P/B, compared to historical average
- Gearing
- Interest cover
- CAGR of DPU growth
- Distribution/Revenue: If ratio is low, it means that the REIT have high costs or REIT manager takes a big cut.

Regarding gearing, all along I assumed that the lower it is, the better.
However, someone I know thinks that high gearing is an indication of the REIT's credit worthiness.
The argument is that normally REIT would want to borrow as much as possible, since that would increase DPU.
But a bank would not be willing to lend much to a weaker REIT, resulting in lower gearing.
Banks do alot of due diligence before lending, much more than the average retail investor. So a REIT with high gearing means that it has passed the banks' stringent checks.
I thought this is quite an interesting perspective.

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%.

Hi "gzbkel"

Your model is :

“Value of one share = (Cash per share) - (Debt per share) + (Distribution from REIT until property lease expires)”

If the concept or underlying principle of your model is:

“Value of one share = the sum of its discounted future DPU”,

then the appropriate model to use is Dividend Discount Model (DDM),

See http://www.investopedia.com/articles/fun...041404.asp

then (Cash per share) – (Debt per share) would be irrelevant and should be discarded, unless conceptually you are thinking something else.

Quote:
Conclusion
The dividend discount model is by no means the be-all and end-all for valuation. That being said, learning about the dividend discount model does encourage thinking. It forces investors to evaluate different assumptions about growth and future prospects. If nothing else, the DDM demonstrates the underlying principle that a company is worth the sum of its discounted future cash flows. (Whether or not dividends are the correct measure of cash flow is another question.) The challenge is to make the model as applicable to reality as possible, which means using the most reliable assumptions available.
Unquote:

Hi Boon
I thought of applying DDM, but DDM assumes that the dividend is perpetual, which is not true for REITs due to the limited lease on most properties.
Also, I wanted a way to compensate for the high amount of debt of most REITs, which was why I added the (Cash per share) - (Debt per share) part.
I am aware that REITs do not work this way (hold properties until they expire, pay off all debts and then unwind), since they usually recycle properties and constantly raise equity for new purchases. So this formula does not reflect real life very well.

Hi "gzbkel"
Your model is :
“Value of one share = (Cash per share) - (Debt per share) + (Distribution from REIT until property lease expires)”
If the concept or underlying principle of your model is:
“Value of one share = the sum of its discounted future DPU”,
then the appropriate model to use is Dividend Discount Model (DDM),
See http://www.investopedia.com/articles/fun...041404.asp
then (Cash per share) – (Debt per share) would be irrelevant and should be discarded, unless conceptually you are thinking something else.
Quote:
Conclusion
The dividend discount model is by no means the be-all and end-all for valuation. That being said, learning about the dividend discount model does encourage thinking. It forces investors to evaluate different assumptions about growth and future prospects. If nothing else, the DDM demonstrates the underlying principle that a company is worth the sum of its discounted future cash flows. (Whether or not dividends are the correct measure of cash flow is another question.) The challenge is to make the model as applicable to reality as possible, which means using the most reliable assumptions available.
Unquote:

While Reits are relatively transparent, everyone is quite different when i start diving in depth, and this variables have a function on returns therefore yields.

Long run i believe property quality (location, lifespan, ... ) and Debt cost will pull you ahead. If you are happy with the dividend yields after the two, i think is good investment. One of the book i read advocate timing as well but i would have to balance with opportunity cost.

[Chrissyy]

Hi all,

I'm new to REITs but while I'm learning, I see tons of articles telling me that when analyzing REITs, it's best to look at its Funds From Operations (FFO) and/or Adjusted Funds From Operations (AFFO). However, I don't see many REIT investors mentioning about it when speaking about respective REITs. Instead, I hear/see more mentions about its yield and gearing ratio, which of course, is important.

Furthermore, I tried looking into a few Annual Reports of some local REITs and they don't have a FFO calculation footnote in their financial statements.
Is it because these metrics don't really apply to local REITs or something? If so, why?

Hope you guys can enlighten me.

[AlphaQuant]

Furthermore, I tried looking into a few Annual Reports of some local REITs and they don't have a FFO calculation footnote in their financial statements.

Try looking at the Consolidated Statement of Cashflows (which normally appears after the Income Statement and Balance Sheet) - under Cashflows from Operating Activities.

[Chrissyy]

Alright, thanks!

[Boon]

Hi all,

I'm new to REITs but while I'm learning, I see tons of articles telling me that when analyzing REITs, it's best to look at its Funds From Operations (FFO) and/or Adjusted Funds From Operations (AFFO). However, I don't see many REIT investors mentioning about it when speaking about respective REITs. Instead, I hear/see more mentions about its yield and gearing ratio, which of course, is important.

Furthermore, I tried looking into a few Annual Reports of some local REITs and they don't have a FFO calculation footnote in their financial statements.
Is it because these metrics don't really apply to local REITs or something? If so, why?

Hope you guys can enlighten me.

Difference in accounting treatment and reporting/disclosure standards - see the following 2008 report.
________________________________________________________________________________________________________________

The North American real estate industry is characterized by the widespread use of a non-GAAP summary performance measure known as Funds from Operations (FFO) as an alternative to net income in measuring profitability. There have been continued debates among industry participants and standard setters on the relative usefulness of FFO compared to net income. Previous studies on U.S. REITs present mixed evidence and show that both measures FFO and Net Income are in general relevant when valuing the trusts. At present there is no conclusion on the usefulness of FFO, or any other non-GAAP performance measures, for the international REITs as well as for the Canadian REITs, a market with a capitalization of over CDN$ 23 billion.

1.1 The Use of FFO or Other Non-GAAP Performance Measures

Previous academic studies (Fields et al. (1998), Vincent (1999)) show that most U.S. REIT firms report FFO information in their annual reports. The common use of FFO in the U.S. may be due to the fact that the National Association of Real Estate Investment Trust (NAREIT) is a strong advocate of FFO and that the Security and Exchange Commission (SEC) supported the development of an “industry standard”, particularly for measures of performance. In Canada, the concept of FFO has been widely used by Canadian REITs since the introduction of the definition (see the White Paper on Funds From Operations, issued by the Real Property Association of Canada (REALpac), 2004). Rules regarding the reporting of non-GAAP financial measures by the Canadian Securities Administrators (CSA) has led REALpac (formerly known as the Canadian Institute of Public and Private Real Estate Companies or CIPPREC), to conclude that FFO may no longer be included in financial statements. Most Canadian REITs report FFO in the Management Discussion & Analysis (MD&A) report.

In this study, we intend to document the reporting of FFO and other non-GAAP performance measures by REITs operating in countries that have adopted IFRS. The North American real estate industry argues that net income is an insufficient measure of REIT performance as the measure includes depreciation which is based on historical cost and assumes incorrectly that real estate assets value diminishes predictably over time. Given that IFRS allows companies to recognize their real estate assets at fair value and to not recognize depreciation expense for their investment properties, it is possible that the usefulness of the net income measure has improved for firms under IFRS and that there is a lesser need for non-GAAP alternative performance measures such as FFO. In addition, by reporting investment properties at fair value, it is possible that other performance measures based on the balance sheet may increase in importance.............................

http://c.ymcdn.com/sites/www.realpac.ca/...emeasu.pdf

[Greenrookie]

Hi buddies,

How different is FFO from NPI ( net property income) ? Thanks

[Chrissyy]

Hi all,

I'm new to REITs but while I'm learning, I see tons of articles telling me that when analyzing REITs, it's best to look at its Funds From Operations (FFO) and/or Adjusted Funds From Operations (AFFO). However, I don't see many REIT investors mentioning about it when speaking about respective REITs. Instead, I hear/see more mentions about its yield and gearing ratio, which of course, is important.

Furthermore, I tried looking into a few Annual Reports of some local REITs and they don't have a FFO calculation footnote in their financial statements.
Is it because these metrics don't really apply to local REITs or something? If so, why?

Hope you guys can enlighten me.

Difference in accounting treatment and reporting/disclosure standards - see the following 2008 report.
________________________________________________________________________________________________________________

The North American real estate industry is characterized by the widespread use of a non-GAAP summary performance measure known as Funds from Operations (FFO) as an alternative to net income in measuring profitability. There have been continued debates among industry participants and standard setters on the relative usefulness of FFO compared to net income. Previous studies on U.S. REITs present mixed evidence and show that both measures FFO and Net Income are in general relevant when valuing the trusts. At present there is no conclusion on the usefulness of FFO, or any other non-GAAP performance measures, for the international REITs as well as for the Canadian REITs, a market with a capitalization of over CDN$ 23 billion.

1.1 The Use of FFO or Other Non-GAAP Performance Measures

Previous academic studies (Fields et al. (1998), Vincent (1999)) show that most U.S. REIT firms report FFO information in their annual reports. The common use of FFO in the U.S. may be due to the fact that the National Association of Real Estate Investment Trust (NAREIT) is a strong advocate of FFO and that the Security and Exchange Commission (SEC) supported the development of an “industry standard”, particularly for measures of performance. In Canada, the concept of FFO has been widely used by Canadian REITs since the introduction of the definition (see the White Paper on Funds From Operations, issued by the Real Property Association of Canada (REALpac), 2004). Rules regarding the reporting of non-GAAP financial measures by the Canadian Securities Administrators (CSA) has led REALpac (formerly known as the Canadian Institute of Public and Private Real Estate Companies or CIPPREC), to conclude that FFO may no longer be included in financial statements. Most Canadian REITs report FFO in the Management Discussion & Analysis (MD&A) report.

In this study, we intend to document the reporting of FFO and other non-GAAP performance measures by REITs operating in countries that have adopted IFRS. The North American real estate industry argues that net income is an insufficient measure of REIT performance as the measure includes depreciation which is based on historical cost and assumes incorrectly that real estate assets value diminishes predictably over time. Given that IFRS allows companies to recognize their real estate assets at fair value and to not recognize depreciation expense for their investment properties, it is possible that the usefulness of the net income measure has improved for firms under IFRS and that there is a lesser need for non-GAAP alternative performance measures such as FFO. In addition, by reporting investment properties at fair value, it is possible that other performance measures based on the balance sheet may increase in importance.............................

http://c.ymcdn.com/sites/www.realpac.ca/...emeasu.pdf

Ohh, that surely cleared my doubts.

Thank you so much!

[Chrissyy]

Hi buddies,

How different is FFO from NPI ( net property income) ? Thanks

I think the main difference lies in the inclusion/exclusion of Depreciation & Amortization Charges between both calculations.

I'm not sure if I'm correct but I think this is what you're looking for.
_______________________________________________________________________________________________________________________

The formula for FFO is:
Funds from Operations = Net Income + Depreciation + Amortization - Gains on Sales of Property

In general, the adjustments FFO makes to net income are intended to compensate for accounting methods that may distort a real estate investment trust's true performance. This is especially true of depreciation. Generally Accepted Accounting Principles (GAAP) require REITs to depreciate their investment properties over time. However, many REIT properties actually appreciate over time, and for this reason, the required depreciation expense tends to make net income appear artificially low. FFO also adjusts for gains (or losses) on the sale of properties because they are not recurring and therefore do not contribute to the REIT's ongoing dividend-paying capacity (REITs are required to pay out 90% of their taxable income in dividends). Some analysts go a step further and calculate Adjusted Funds from Operations (AFFO), which adjusts FFO for rent increases and certain capital expenditures.

Source: http://www.investinganswers.com/financia...ns-ffo-813
_______________________________________________________________________________________________________________________________

Please correct and forgive me if I'm wrong.

[Boon]

I think this would have great implications to S-Reits with foreign income if the tax exemption scheme for foreign income is not extended at expiry in 31 March 2015.
________________________________________________________________________________________________________________
The article is first published in The Business Times on 18 February 2014

Since its inception in 2002, the REIT market in Singapore has achieved tremendous growth.

Today, Singapore's REIT market has more than 30 listed REITs and a handful of other listed property business trusts. Its market capitalisation is in excess of US$65 billion.

The success of the REIT market here has added depth and breadth to Singapore's capital markets.

Jobs have also been created for REIT and property players, bankers, lawyers and other professionals in Singapore.

In addition, the REIT market has helped distinguish the Singapore Exchange (SGX) as the pre-eminent stock exchange in the region.

It has also provided investors in Singapore with an alternative investment mode - one that promises a tax-efficient, stable, and regular return on their investment.

Sustaining Singapore's success in the REIT market

Clearly, Singapore makes a compelling story for REIT listings in Asia, with its success prompting other countries in the region to follow suit.

The governments of Hong Kong and Malaysia, in particular, started their own REIT laws and regulations soon after Singapore's were conceived.

India, China, Indonesia and Thailand are also looking at doing the same. Yet the REIT markets in these countries have not grown in the same manner or to the same degree as that of Singapore's.

What makes Singapore's REIT market tick? Can this success be sustained?

One would argue that tax incentives such as tax transparency on Singapore income and tax exemption on foreign income granted to Singapore-listed REITs (or S-REITs) are part of the magic that makes S-REITs so attractive.

Indeed, S-REITs are tax-efficient and enable investors to maximise investment returns with minimal tax leakages.

Yet, there are some tax-related issues that could potentially be the bane of REIT sponsors, managers and investors alike.

An expiring foreign income exemption regime

S-REITs currently enjoy tax exemption on foreign income where certain conditions are met and approval is granted by the tax authorities.

When S-REITs were first granted foreign income exemption in early 2000, the exemption was for an indefinite period.

However, in late 2000, an expiry date of 31 March 2015 - or the sunset clause - was introduced and caught the REIT market by surprise.

S-REITs that had structured their foreign property investments to obtain foreign income exemption now had to contend with the possibility of a less efficient tax structure after 31 March 2015.

If the foreign income exemption regime is not extended, the foreign income received by these S-REITs after 31 March 2015 will be subject to tax.

These S-REITs must restructure so that they become tax-efficient again, and doing so inadvertently leads to more costs.

Further, it is a requirement for new REITs seeking a listing on SGX to project their income and yield over the next two years in their listing prospectuses. With the sunset clause in place, such REITs have a problem making their projection.

Should they assume that the regime will be extended in the projection? If so, on what basis can this assumption be made? On the other hand, if the REITs assume that the regime will not be extended, their prospectuses would show a drop in projected yield.

Having an expiry date on the foreign income exemption regime for S-REITs creates uncertainty and may not do the REIT market any favours.

Interpretation of undertaking

S-REITs enjoy tax transparency on certain Singapore income. This means that such income is not taxed at the S-REIT level but is instead subject to tax in the hands of the investors, by way of withholding, depending on their respective tax status.....................................

............................................................................................................... The current successful state of the REIT market in Singapore is due in no small part to the clear regulatory and tax frameworks that the Singapore Government has put in place.

To ensure the continued growth and success of the industry, the relevant authorities must provide a clearer guiding light on the road ahead for REITs in Singapore.

The authors are Leonard Ong and Agnes Lo, who are respectively Tax Partner and Senior Tax Manager at KPMG in Singapore. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.

http://www.kpmg.com/SG/en/SingaporeBudge...40218.html
________________________________________________________________________________________________________________

5.6

As announced in the Budget Statement 2010, the tax exemption scheme for foreign income received by the trustees of S-REITs will expire on 31 Mar 2015 (unless specifically revoked earlier). Accordingly, S-REIT foreign income received in Singapore by a trustee of an S-REIT or its wholly-owned Singapore resident subsidiary after 31 Mar 2015 will not enjoy tax exemption, unless the scheme is extended.

http://www.iras.gov.sg/irashome/uploaded...-05-30.pdf

[reggas]

just airing my reading...
The article by KPMG Leonard Ong and Agnes Lo in BT 18Feb 2014, is alarmist.

Boon's 5.6 extract of his iras link is a teaser
And the concern is really eradicated if we read on to para 5.7 of Boon 's link http://www.iras.gov.sg/irashome/uploaded...-05-30.pdf


which in simple terms means S-Reits will continue to receive tax exemption post 15March 2015 from income of its foreign assets acquired before 15 March 2015 as long these assets continues to be beneficially owned, directly or indirectly post 15Mar2015

So....the gate closes for NEW foreign acquistions. The older foreign assets ( pre 15Mar2015) remittance to the trustee in Singapore are still tax exempt.

Is that the motivation First Sponsor, Fraser HTrust rush to list.....they have foreign real estate assets.

can infer what other existing Reits will get hot in their acqusitions trail?

jus my interpretation of the link 's content