MRCB-Quill REIT declares a DPU of 8.39 sen for FY17

MRCB-Quill REIT declares a DPU of 8.39 sen for FY17
January 20, 2018, Saturday



KUCHING: MRCB Quill Management Sdn Bhd (MQM), the manager of MRCB-Quill REIT, a listed real estate investment trust, wishes to announce that MQReit achieved a realised net income of RM21.42 million for the fourth quarter of 2017 (4Q17).

This is an increase of approximately 61 per cent from the realised net income of RM13.30 million recorded for 4Q16. The higher realised net income for this quarter was attributable to the recognition of income from Menara Shell, net of higher property operating expenses, finance costs, trustee’s fee and manager’s fee.

For the full year, MRCB-Quill REIT achieved a realised net income of RM88.01 million, an increase of 48.8 per cent compared to the realised net income of RM59.16 million recorded for the financial year ended FY16.

Correspondingly, realised earnings per unit (EPU) for financial year ended FY17 of 8.24 sen was recorded.

After taking into consideration the non-cash adjustment for manager’s fee payable in units and net fair value loss on investment properties, MRCB-Quill REIT achieved a distributable income for FY17 of RM92.4 million.

FY17 distribution per unit (DPU) was 8.39 sen, which is 0.1 per cent higher compared to the FY16 DPU of 8.38 sen. The FY17 DPU of 8.39 sen translates to a distribution yield of 6.7 per cent based on the closing price of RM1.25 per unit as at 29 December 2017.

Tan Sri Saw Choo Boon, chairman of MQM said: “We expect the office market outlook to remain challenging this year. We will focus on asset management and leasing strategies that are centered on tenant retention as well as managing MRCB-Quill REIT’s operational cost effectively.”

Yong Su-Lin, chief executive officer of MQM said: “The manager’s active leasing and asset management strategies throughout the year has ensured successful tenant renewals of 80 per cent for the leases due in 2017.

“On the back of this as well as new tenancies entered during the year, MRCB-Quill REIT’s average occupancy rate for the year stood at 96.3% in terms of Net Lettable Area (NLA).

“In respect of 2018, MRCB-Quill REIT has approximately 28 per cent of its leases based on NLA that are due for renewal, with the bulk of the leases due after the first half of 2018.

“In tandem with executing our on-going marketing strategies, we continue to identify asset enhancement initiatives centered on enhancing the quality and physical condition of MRCB-Quill REIT’s portfolio of properties.

“Premised on the above, scheduled enhancement works will be initiated for a few properties for this financial year, namely Wisma Technip, Plaza Mont Kiara, Platinum Sentral and Menara Shell.”

She added: “As at Dec 31, 2017, MRCB-Quill REIT’s gearing ratio stood at 37.3 and 76 per cent of its total borrowings are on fixed interest rate.

“As part of our capital management strategy to maintain majority of fixed rate borrowings, we will continue to monitor the interest rate environment with the aim of locking in fixed interest rates at an appropriate time via interest rate swaps.

“This will help to mitigate MRCB-Quill REIT’s exposure to future interest rate risk and provide income stability to the Trust.”


http://www.theborneopost.com/2018/01/20/mrcb-quill-reit-declares-a-dpu-of-8-39-sen-for-fy17/

REITs to see earnings impact from higher borrowing costs

REITs to see earnings impact from higher borrowing costs
January 23, 2018, Tuesday


KUCHING: Real estate investment trusts (REITs) is expected by analysts to have potential earnings impact of 0.2 per cent to 2.1 per cent from higher borrowing costs.

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), market is expecting an announcement of a 25 basis points (bps) increase in overnight policy rate (OPR) to be announced later this Thursday.

Some had even predicted the possibility of two rate hikes of 25 bps each for 2018 while MIDF Research’s house expected only one rate hike this year.

Based on the research arm’s sensitivity analysis, earnings per unit (EPUs) of REITs under its coverage are limited to minus 0.2 per cent to minus 2.1 per cent if there is one rate hike of 25bps.

“REITs with higher floating rate loans are more likely to be affected by the increase in interest rate,” it said.

Among the REITs that MIDF Research covered, Amanahraya REIT’s loans were all based on floating rates.

“Conversely, IGB REIT’s floating rate loans was only kept at one per cent.”

The research arm gathered that REIT managers were working on converting part of their floating rate loans to fixed rate loans to mitigate the risk of potentially higher interest costs.

MIDF Research highlighted that although a rate hike may have adverse impact to the bottomlines of REITs notably due to higher borrowing costs and potentially a slightly narrower spread between 10-year Malaysian Government Securities (MGS) yield and dividend yields from REITs, other factors at play may change the dynamic of the unit price movement.

“For instance, when Bank Negara announced a 25bps rate increase on July 10, 2014, price movements of REITs were mixed,” it said.

“Of the seven REITs under our coverage, only two REITs showed downward price movement of minus 5.9 per cent (Capitaland Malaysia Mall Trust) and minus 6.7 per cent (Amanahraya REIT).

“The rest had showed positive movement from the period of July 10, 2014 until December 10, 2014.”

All in, MIDF Research kept its estimates unchanged until the actual announcement of the rate hike and maintained ‘neutral’ on the sector.

Security Commission proposals push REITs in the right direction

September 30, 2016, Friday Ronnie Teo


KUCHING: Analysts laud the Securities Commission’s (SC) consultation paper to revise its guidelines for Malaysian Real Estate Investment Trusts (M-REITs) seen as a positive step in the right direction.

The guidelines aims to enhance M-REITs’ growth by broadening the scope of permitted activities, improve governance to safeguard investors and maintain long-term sustainability, and increase efficiency by streamlining post listing requirements.

The main highlight is Proposal 1 for Property Development Activities, which essentially allows M-REITs to undertake greenfield development subject to the development not exceeding 15 per cent of the REITs enlarged total asset value (TAV) in aggregate, thus capping the exposure to development risk.

“All in, we are positive on Proposal 1,” highlighted researchers with Kenanga Investment Bank Bhd (Kenanga Research).

“Although there is no accretion to earnings in the near term, and is only earnings positive in the longer run, we expect news flow on greenfield development to bode well for share price sentiment and valuations.

“We view Proposal 1 positively as it allows REITs to grow earnings given limited opportunities for accretive acquisitions in the current low cap rate conditions.

Kenanga Research observed that current cap rates for retail assets range between four to six per cent, while the rate was between six to eight per cent for industrial assets.

“M-REITs would be able to own assets at lower capital outlays; essentially, the real return on investment on development cost will be better than buying already completed buildings, which are based on market value with lower asset financing cost.

“Additionally, there is the icing on the cake when the greenfield development is completed, arising from revaluation exercise to reflect market valuation, which will further boost their asset and book value without additional cash-outlay.

“This opens the door of opportunity for M-REITs’ earnings growth in the longer run and will help alleviate the burden of low cap rates plaguing the market currently, but the impact to earnings is expected to be neutral in the near term, and accretive only in the longer run post construction.”

It is also important to note that the new guideline stipulates that the REITs would have to hold the assets for a minimum of two years post development, making it unlikely for the REIT to take on development unnecessarily unless there is a clear demand for it.

“We believe industrial REITs would be the main beneficiary. Although all M-REITs would be able to benefit from Proposal 1 by gaining higher development cost yields, we believe industrial REITs may fare better as development cost for industrial assets may be cheaper than retail, while it would also be easier for industrial MREITs such as Axis REIT to find a pre-committed tenant as it can operate on fewer tenants or a single tenant basis,” it said.

“To note, retail M-REITs require multiple tenants and may not be able to secure a pre-commit during or before construction. As such, retail M-REITs have greater leasing risk, which we believe can be mitigated should the REITs have extensive tenant network to leverage on.”

The firm was all in positive on SC’s list of Proposals, as it expect news flow related primarily to Proposal 1 to 4 to bode well for share price sentiment and valuations, with minimal impact to earnings in the near term.

“Besides Proposal 1, Proposals 2 to 4 are expected to be beneficial to unitholders as it is catered towards facilitating earnings growth by increasing the scope of permitted activities by M-REITs, making it easier for them to secure tenants or minimise vacant space,” it added.

“Proposal 5 on unit buy-backs aims to lend stability to share price and is a form of returning cash to unitholders, while Proposal 6 will help limit balance sheet risks amidst increased exposure to property development.

“Proposals 7 to 10 are catered towards enhancing governance and transparency which we view positively as it will benefit shareholders as it aims to protect shareholders and ensures the sustainability of M-REITs without burdening the managers.

“Additionally, Proposal 11 (revaluation of assets) which is also targeted at enhancing governance, requires the REIT to revalue its assets once every financial year versus once in three years previously, which we view as neutral impact to unitholders.

“Although frequent asset valuations capture the assets current market value which is beneficial for transparency to unitholders, asset revaluations do incur additional costs, while volatile property market conditions may affect capital values of the assets, and may negatively impact the REITs gearing ratio,” it added.

Proposals 12 to 13 are geared towards streamlining post listing requirements allowing MREITs to be on par with other listed corporations, including the process for rights issuance which is currently longer and more arduous for M-REITs.

Other proposals include Proposal 14 (Property Management) will be beneficial to investors and managers as it aligns the interest of the REIT Manager with the property manager.

Proposal 15 (Internal Management) will be beneficial to investors as it forces the existing REIT manager to perform, while failure to do so will allow a ‘Change of the REIT Manager’ (Proposal 9), giving shareholders the option to remove the existing manager and allow the REIT to be managed by hiring executives to internally manage the REIT.

Lastly, Proposal 16 which limits the offer of unlisted REITs to Sophisticated Investors aims to protect investors that do not have privy access to information to invest in an unlisted REIT.

http://www.theborneopost.com/2016/09/30/security-commission-proposals-push-reits-in-the-right-direction/

How to analyze real estate developers

How to analyze real estate developers

Real estate stocks make up a significant number of companies in Asian stock exchanges and many of them are among the the most volatile stocks. Whether the real estate developer is listed or not, they are influenced by a host of cyclical factors ranging from government policies, interest rates, unemployment rates, affordability, etc. Hence, it is important to understand how real estate companies can be analyzed.


Profit Model

Real estate industry can be separated into the following sub-industries or types of real estate developers:

1. Residential real estate developers
2. Commercial and mixed use real estate developers
3. Industrial real estate developers

Profit model of residential real estate developers

Residential real estate developers are more dependent on economies of scale than ever because of increasing land prices and declining rate of increase in residential property prices. In many developing countries, developers used to be able to acquire land at cheap prices and hope for rapid increase in home prices to make huge profits. In developed countries, land prices are higher, and price increases are more muted. Hence, brands and good management are playing an increasingly important role.


Profit model of commercial real estate developers

As prime real estate for commercial developments become more scare, commercial real estate developers tend to prefer to have rental incomes rather than selling units so that they can have consistent income and manage the properties. These developers are also more likely to sell their commercial properties to real estate investment trusts to free up capital and many are REITs that also develop properties.


Profit model of industrial real estate developers

Industrial real estate developers operate more like commercial real estate developers as they seek to have stable rental incomes and also sometimes selling their properties. Some industrial estate developers might even have a fund to invest in promising industrial companies so as to achieve higher profits.



Factors that Affect Value

1.  Land bank - the value of a real estate developer is directly influenced by its land bank. As the larger the land bank, usually means the developer can make more profits from developing the land banks later. Hence, the land bank that a real estate company has is always disclosed in detail in the listed companies' reports.

2.  Inventories - Real estate inventories can be separated into a few categories. Usually increasing values of construction-in-progress and land held for development will translate to higher future earnings for the company:

• Completed developments - properties whose construction has been completed
• Construction-in-progress - means the value of properties under construction.
• Land held for development - value of land help for future developments.
• Investment properties - properties held for rent or sale

3.  Customers deposits - for residential projects, it is often that developers will collect customers deposits or even prepayments of entire houses prior to completion of the units. As these properties are pre-sold and their profit and loss have yet to be recognized in the income statement, growing customer deposits could signal increasing revenue and most likely profits in the coming years ahead.

4.  Housing prices - the profits from real estate developers that primarily sell their developments come from selling the units at above costs. Hence, the moving of housing prices have direct impact on the profitability of residential real estate developers. Usually the stock price of real estate developers have high correlation with the anticipated housing price direction.

5.  Rental rates - Rental rates are especially important for commercial and industrial real estate developers as most of them do not sell all the units that they developed but they keep these units for rental returns. Rental rates have direct bearing on stock prices of such developers and REITs.

6.  Industry consolidation - as economic difficulties mount and economies of scale becomes more important, mergers and acquisition activities will also drive prices of real estate companies as the merged entities might be more efficient given a larger land bank.

7.  Macro economic factors - government policies play a huge role in controlling property prices as the following factors will determine the direction of property prices. We have listed

Factor                 Movement      Likely Effects
Interest rates         Up                Negative
Land supply          Down            Positive on short term price but will affect future
                                                  profitability if land bank dries up
Loan Quantum      Up                 Positive
Reserve ratio         Up                Negative
GDP                     Up                Positive
Unemployment      Up                       Negative




Valuing Real Estate Developers

A common method to value real estate developers is using the Revalued Net Asset Value ("RNAV") approach which basically determines the net asset value of a real estate developer by adding up

• the change in value of the investment properties held by the company, 
• the surplus value of properties held for development using Discounted Cash Flow method and 
• the net asset value of the company with any other adjustments that are deemed necessary.

Usually a discount or premium percentage is multiplied with the RNAV base on the developers other qualities such as management capabiltiies, branding, track record, etc. A smaller developer with poor record of continuously generating consistent income is usually given a significant discount to its RNAV.

Using the RNAV approach only takes into account of what the developer can earn with the assets that it has in its books at the time of the valuation. If properly applied, it is usually more conservative than the market approach such as P/E multiples.

However, to use this method, it requires a lot of work in revaluing the properties held by the developer, making it difficult to implement by most people as information needed to determine RNAV needs some skill in obtaining.

The price earnings ratio method could also be useful to cross check the RNAV method.

Source: http://roccapitalholdings.com/content/how-analyze-real-estate-developers

3 Big Risks Investors Must Know About A Real Estate Investment Trust

By Stanley Lim Peir Shenq, CFA

The Singapore stock market is home to some of the largest real estate investment trusts in the region. REITs such as Ascendas Real Estate Investment Trust (SGX: A17U), CapitaLand Mall Trust (SGX: C38U), Mapletree Logistics Trust (SGX: M44U)and Mapletree Industrial Trust (SGX: ME8U) all have a market capitalisation of over S$2 billion each.

Land is a very valuable commodity in Singapore given that it is a tiny island nation. Moreover, REITs in Singapore tend to offer high yields as well, relative to the broader market.

But, REITs are far from being a risk-free investment. Investors need to understand how REITs are structured in order to gain better awareness of the risks involved. Here are three big risks that I’m watching with REITs.

Lack of a safety net

REITs are required by regulation to distribute 90% of their taxable income each year as distributions to enjoy tax-exemption. That would explain why most REITs tend to have high dividend yields.

But, this means that REITs are not able to build up a cash reserve to strengthen their balance sheets and protect themselves against any adverse economic conditions. The need to distribute most of their income would also mean that REITs lack the cash reserves to invest in more properties to grow their distribution.

Therefore, it is common to see REITs issue rights or conduct private placements as a way to raise more capital from time to time. For an investor, there’s a risk that your investment in a REIT may get diluted when it conducts such corporate exercises.

Interest rate risk

The aforementioned inability of REITs to conserve cash would also mean that they’d have to depend on debt for financing. REITs with significant debt on their balance sheets may be facing interest rate risk.

In the event that interest rates rise, this may cause a hike in a REIT’s interest expenses. In turn, the amount of distributable income that the REIT can generate might drop significantly, thus negatively impacitng the distribution yield of a REIT. When this happens, the unit price of a REIT may be affected as REIT-investors may dispose of it in search of higher yields.

Use of short-term debt

Generally speaking, the bulk of a REIT’s assets are properties that can last for decades or even centuries. In other words, a REIT’s assets are mainly long-term in nature. But, the borrowings of most REITs are relatively short-term, with typically less than 10 years to maturity.

As such, this creates a type of asset and liability mismatch, in the sense that REITs are using short-term liabilities (debt) to finance long-term assets (properties). In fact, REITs have a constant need to refinance their borrowings while holding onto the same assets.

In the event of liquidity drying up, such as during the Global Financial Crisis of 2008-09, a REIT may be caught in a dangerous position of being unable to find any refinancing options when its debt comes due. If that happens, the REIT would most likely have to undertake a huge rights issue or private placement – at a deeply discounted unit price to boot.

In this scenario, an investor in the REIT may see his or her stake diluted sharply (from a large private placement) and/or be required to fork out a large sum of money (from a rights issue) to reinvest in the REIT and save it from financial difficulties.

Foolish Summary

REITs can be great investments. But, investors should be aware that a great investment opportunity does not mean that it is risk-free. Understanding the key risks of REITs would give an investor an edge when it comes to managing his or her investment portfolio.

https://www.fool.sg/2016/02/01/3-big-risks-investors-must-know-about-a-real-estate-investment-trust/?source=facebook

Health Care REIT

Health Care REIT, Inc.

HCN (NYSE)

Website: www.hcreit.com

Sector:  Health Care
Beta Coefficient: 0.43
10 Yr Compound EPS Growth:  20.5%
10 Yr Compound DPS Growth: 2.5%

Dividend raises, past 10 years: 10 times.


Financial Result Year 2014

Revenues (m)     3,344
Net Income (m)    505.0
Funds from operations per share  4.13
Real Estate owned per share 69.5

DPS 3.18
Current yield 4.4%

High Price  78.2      DY 4.07%
Low Price   52.9     DY 6.01%

This is a large REIT, paying yield exceeding 5 percent.

It invests primarily in senior living and medical care properties primarily in the U.S.  

The REIT owns and/or operates some 1,328 properties in three countries and operates assisted living, skilled nursing, independent-living and the medical centers.

Health Care REIT operates in three primary business segments:

• Seniors Housing "triplet-net" segment:  primarily owning senior housing properties.  This segment owns 666 properties, most in the US and contributes 33% of revenues.
• Seniors Housing Operating segment which operates 202 properties in 34 states, 54 in Canada and 41 in UK and contributes about 43% of revenues.  This is the fastest-growing segment.
• Medical Facilities which operates office space set in 241 facilities for medical purposes, inpatient and outpatient medical centers and life science laboratories, contributing about 14% to revenues.

Occupancy rates are 87.7% in the Seniors Housing triple-net segment, 90.3% in the Seniors Housing Operating, and 94.4% in the Medical Facilities segment.

In 2014 and early 2015, the company made two medium-sized common stock sales, which hurt the stock price temporarily but also funded the acquisition of $3.7 billion in new real estate investments.

The company added a modest number of shares again in 2015 to fund acquisitions and to approach a goal of 60% equity.

REITS are typically good income producers, as they are required by law to pay a substantial portion of their cash flow to investors.

The accounting rules are different, and REIT investors should focus on Funds From Operations (FFO), which is analogous to operating income.

(Net income figures have depreciation expense deducted, which can vary in timing and not always be realistic.)

FFO support the dividends paid to investors.

Investing in such a REIT, you are investing in real estate and in the health-care industry, and with the property mix owned by Health Care REIT, you are investing in the aging population.

HCN (NYSE)

5 Reasons Why You Should Invest In Malaysian REITs Now

 contributor Finance Oct. 3, 2014

Malaysian property investments have become less attractive these days due to the skyrocketing prices and also the various cooling measures implemented by the authorities. This has set many people from the middle and lower income groups back from buying their first home or investing in property.
However, other than investing in physical properties, Malaysians can consider investing in Malaysian Real Estate Investment Trusts (MREITs). Unlike business trusts, Malaysian REITs are trusts which invest in properties only. They are traded on stock exchanges and are eligible for special tax exemption.

Here are five reasons why you should invest in REITs in Malaysia:

1. Small starting capital

Most property investments require a significant amount of money to start. Even with 90% loan, a RM500,000 property would require at least RM50,000 down payment plus extra for legal fees and stamp duties. For MREITs, you can start investing with as little as RM140 (100 shares of Pavilion REIT at RM1.40).

2. Get exposure to the top shopping malls and commercial buildings

With MREITs, you will be able to buy into the top shopping malls in Malaysia. Malls such as Pavilion (Pavilion REIT), MidValley Megamall (IGB REIT), Sunway Pyramid (Sunway REIT) are all available on Bursa Malaysia. As an individual property investor, you would have little chance of owning such popular shopping malls, other than certain strata title types like Berjaya Times Square. With MREITs, your dream of owning a part of these popular commercial properties can be a reality.

3. Earn regular dividends

Like property rentals, MREITs also generate income in the form of dividends. Since MREITs are usually diversified, vacancy rates are generally low so they are a more stable form of income as compared to physical properties which could have vacancy periods.
The frequency of dividends payout for REITs is quarterly or bi-annually, making them an ideal investment for retirement income. To make it even more attractive, the dividend payout for REITs tend to be pretty high as they need to pay out at least 90% of their net income to be eligible for tax treatment.

4. Ease of buying and selling MREITs

As MREITs are exchange traded, buying and selling them is generally easier compared to physical properties. MREITs are bought and sold like normal stocks so the prices are transparent and the transactions take place instantly. For property transactions, it is normal to take between six to 12 months at least to find the right buyer at the right price and go through the sales and purchase agreement (SPA) process.

5. Minimal effort required

One of the key advantages of MREITs is that there is minimal effort required to maintain these investments. MREITs hire professional management teams to manage the tenants and upkeep of the properties, leaving you to enjoy the fruits of your labour. Anyone familiar with property investments will know that there is in fact a lot of work involved in managing your own properties.
At current market condition, dividend yields of most MREITs are pretty attractive compared to other investments, ranging from 5% to 6%. Given the stability of the dividend income and quality of the properties, MREITs are generally good investments to consider.
About the Author
Calvin Yeo, CFA, CFP is the Managing Director of DrWealth. Dr Wealth is ASEAN’s leading site on personal finance. We offer users high quality articles and research on all areas of Personal Finance including Retirement Planning, Investments, Savings, Insurance etc. In addition, we provide effective and simple to use mobile and desktop software tools that help you track, model and plan all your finances.


http://www.businessinsider.my/5-reasons-why-you-should-invest-in-malaysian-reits-now/#.VC6xE0lXjIU

Not all REITS are good enough to invest in.

You must learn to avoid investing in sub-par REITS.  These have:
1.  overly high level of debt, and
2.  inconsistent or declining income for distribution.

Here are 6 screens for finding the best REITs:

1.  High distribution yield (at least 5%)
A low distribution yield (less than 5%) tells you that the REIT is currently too expensive to buy.

2.  History of consistent growth in DPU.
You need to ensure that the REIT you invest in has a history (at least 4 - 5 years) of consistent increase in their distribution per unit (DPU) (i.e dividend per share).

3.  High expected DPU growth in the next 1 - 2 years
You have to ensure that the REIT you buy is expected to generate increased income and distribution in the next 1 - 2 years.  This comes from expected increase in property prices, increase in rental or acquisition of new properties.

Cyclical REITs like office, industrial and residential REITs should not be bought when the economy is entering a recessionary phase.  This is a time when these property prices and rental income are expected to decline.  They should only be bought when the economy is recovering from a recession or in an expansionary phase.

4.  Low gearing ratio (< 40% )
Since REITs must pay out 90% of their income in dividends, most REITs can only acquire new properties by taking bank loans.  When a REIT takes on too much debt, it exposes itself to interest rate risk and even defaut risk (when it is unable to service the repayments).

5.  REIT stock price is fairly valued
As an investor, you would want to buy a REIT at a time when its price is below its NAV (undervalued).  Such opportunities arise when there is a lot of pessimism in the market.  At the same time, when the price has risen too high above its NAV (overvalued), you may want to avoid buying the REIT.

6.  REIT must be on a confirming uptrend.

DPU = Distribution per unit.



Ref:  Adam Khoo

The Six main types of REITs

There are 6 main types of REITs

1.  Office REITs - own and operate office buildings
2.  Retail REITs - own and operate retail properties like shopping centres and shopping malls.
3.  Industrial REITs - own and lease out industrial properties that include light industrial properties, factory space, warehouses, business parks and distribution centres.
4.  Hospitality REITs - own and lease properties to hotels and serviced residences.
5.  Health Care REITs - own health care facilities that are leased to health care providers like hospitals, nursing homes and medical offices.
6.  Residential REITs.- own and operate multi-family rental apartment buildings as well as manufactured housing.

Health care and industrial REITs have the highest yields but the lowest potential for capital gains.
Retail, residential and office REITs have relatively lower yields but greater potential for price appreciation.
Office, hospitality and industrial REITs are highly sensitive to the economy (that is, their business performances are cyclical).

Singapore Property Sector (REITS)

Understanding Real Estate Investment Trusts

Investing in REITS

Investing in REITS

Value investors strive to identify investments trading at valuations below intrinsic value. 

The objective is to identify REITS with potential for significant appreciation relative to risk. 

Because REITS are generally regarded as hedges or defensive investments, they may be overlooked during bull markets.

Most recently, REITS in healthcare and industrial sectors have done well because they have both a real estate and a business component.

• Prologis, a REIT with worldwide logistics facility interests and a logistics business to go with it, is a good example.

And during weak economic times, REITS are fairly defensive and often hold up well because of the underlying stability of real estate prices and rent returns.

• That isn't to say they're immune, as has certainly been seen with mortgage REITS and some leveraged residential REITS recently.

REITS and Returns

REITS and Returns

Funds from operations (FFO) is an important measure of a REIT's operating performance. 

FFO includes all income after operating expenses, but before depreciation and amortization.

Growth in FFO typically comes from:

• higher revenues,
• lower costs, and,
• management's effective recognition of new business opportunities.

REITs with a growing FFO are generally more desirable,because this is a demonstration of an ability

• to raise rents and
• keep occupancy stable.

Beware of dividends that are being paid out of profit from the sale of property or from cash reserves; these payments may not be sustainable.

The National Association of REal Estate Trusts (NAREIT at www.nareit.com ) defines FFO as net income (excluding gains or losses from sales of property or debt restructuring) with the depreciation of real estate added back. 

• Most commercial real estate holds its value longer and more fully than other tangible equipment that a business may possess, such as tools or vehicles.
• The depreciation that the accounting process records each year is often overstated.

Current accounting processes may call for depreciation of a building (according to a certain formula) even though the real value of the building may have increased due to outside forces like

• increased demand or
• low supply of vacancies

in the area where the building is located. For this reason, adding back the depreciation is a clearer way to measure the operating profits of one REIT against another.

FFO is more like the cash flow measures used to evaluate other businesses, and in most cases more completely demonstrates annual performance.

Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

Different classes of REITS
1.  Retail/Mall
2.  Office/Commercial
3.  Hospitality
4.  Industrial
5.  Health Care


Comparison of yield across various REITS
1 < 2 < 3 < 4 < 5

Comparison of Potential for Capital Appreciation across various REITS
1 > 2 > 3 > 4 > 5



Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

The retail or mall REITS tend to favour capital appreciation in the value of the underlying assets.

• Malls are hard to duplicate and scarce.  
• In an asset inflation situation, the underlying mall property would increase in value faster than other classes of REIT with the attendant appreciation in the price of the REIT share.  
• The trade off would be lower distribution yield.  
• Since malls REITS are highly demanded, the price of the REIT share often increases to such an extent to reduce the yield on the REIT.

On the other end, the health care REIT seems to give the highest yield but trades off its potential for capital appreciation.

• It is easy to conceive that a health care REIT will not have much capital appreciation in its assets if it has a 15 year fixed lease with an operator for its assets.  
• For example, in a particular such REIT, any increase in rent is undertaken only once and year and only at the same rate as the CPI to keep track with inflation.  Even if the asset increases in value substantially, the REIT will not receive any additional income for the increase since it has signed fixed long term leases with the operator.  As such capital appreciation is capped.  
• On the other side of the equation, the health care REIT is able to pay very consistent and high yields to the unit-holders.  
• Health care REITS are as close to being recession proof as any other class of REIT would allow (assuming the operator does not default).  
• Since health care is by its nature also less prone to cycles compared to offices or industrial business, health care REITS are well recommended in period of grave economic uncertainty.  

Ref:
Value Investing in REITS by Attlee Hue

So how would you value the REIT's business?

1. Book Value
The book value or net asset may not also fully value the REIT as a business operating to maximise the stream of rental and other forms of income derived from the property.  So one should not entirely simply rely on the book value.  Value investors however often would be reluctant to pay for a REIT at a price higher than the NAV unless there is immediate prospect of the NAV being re-valued# once a new valuation is conducted.

Book Value = Value of each of the properties + Value of its other assets (cash, inventory and receivables) - Liabilities

2. Property Yield
The property yield shows the earning power of the properties within each of the REIT's portfolio.

Property Yield = Net Property Income / Property valuation x 100

3. Distribution Yield
Distribution yield gives an indication of how much return you would expect from the REIT on an annual basis from the distribution.

Distribution Yield = Distribution per Unit / Price paid for Unit  x 100.


[#The REIT owns the various properties which would be valued by professional valuers at least once annually. Valuers will often provide a value of each property on the basis that the REIT is a going concern i.e. that the business of the REIT is functioning normally and is not forced by distress to sell the property.]


APPROACH TO REIT VALUATION

Why would you want to invest in a REIT?
You want to accumulate a string of properties with your money and allow them to be managed by a professional manager.

What would you want from your portfolio of properties?
1.  You want to enjoy capital appreciation from the property.  You can achieve this easily by owning the properties.
2.  You want the revenue that the properties might generate.  This revenue is necessary to pay all the property expenses including the mortgage and also to provide for you some return to compensate you for the use of your capital that you have ploughed into the properties. For this, you have to calculate the Property Yield and the Distribution Yield.

What further information do you need to make an intelligent decision?
The Distribution Yield tells you your return if the tenants continue to occupy the premises and pay their rent and rental rates stay the same.
1.  What happens if this happy scenario is affected by economic turmoil?
2.  If the property vacancy increases or rental rates drop, can the mortgage still be serviced by the earnings?

Several investment instruments can bring in steady returns for both young and old.

@ AsiaOne Seeking the Holy Grail of passive income Several investment instruments can bring in steady returns for both young and old. -ST  Aaron Low Tue, Oct 23, 2012 The Straits Times It is the Holy Grail of investing for many of us: Build a big enough nest egg, generate passive income from it and retire comfortably on the steady stream of dividends. Well, it is not just the Holy Grail for retirees these days; now investors young and old want the reassurance of a steady income after the battering our portfolios have taken in recent years. The benchmark Straits Times Index may be up 17 per cent since the start of the year, but not before a roller-coaster ride over the past 12 months that left many of us battered and bruised. Analysts warn that the road ahead looks bumpy, with market movements still likely to be influenced by events and news rather than financial fundamentals. Mr Kelvin Tay, regional chief investment officer at UBS Wealth Management, says many investors want the safe haven of stable returns in an uncertain market. "With interest rates so low, much more attention is being paid to what kinds of steady returns they can get in a market like this," he says. Ms Jane Leung, head of Asia-Pacific at iShares, a subsidiary of asset management firm BlackRock, says that fixed income assets form a valuable core component of diversified portfolios. "They're favoured for moderate volatility, low correlations with other asset classes and stable cash flows." These days investors are spoilt for choice when it comes to investing in income assets. Bonds Probably the simplest of all income instruments is the humble bond. In its most basic form, the bond is essentially a loan made by a lender to a borrower. The borrower pays a lender an interest rate and promises to pay back the money to the lender in full, after an agreed period of time. Bonds can be issued by companies or governments. For instance, you can buy Singapore government bonds or trade in bonds issued by the Land Transport Authority and the Housing and Development Board on the Singapore Exchange (SGX). Mr Brian Tan, director of wealth management at financial advisory firm Financial Alliance, says that if people want safety and a steady income stream, look no further than a bond. The problem is that most bond issues typically come in tranches of $250,000, which put them out of reach for most retail investors. Similar instruments that are listed on the Singapore Exchange include securities such as perpetual securities and preference shares. They also pay a fixed coupon rate every year but differ from bonds in that they have different company rights from bondholders. Companies such as Hyflux and the local banks have issued preference shares through the SGX that pay between 3.9 per cent and 6 per cent a year. Fixed income funds A big disadvantage of buying individual bonds is that the investor is exposed to the risk of the company failing. If the firm goes bankrupt, the investor could potentially lose all the money invested in its bonds. Buying fixed income mutual funds can help get around this problem. These funds are typically managed by fund managers, who use their expertise to select a basket of bonds that generate yield. For instance, JP Morgan's Emerging Market Local Currency Debt Fund invests in debt instruments of various emerging market governments, such as Poland, Turkey and Brazil. Its annualised yield is 7.27 per cent. Mr Tan believes that for retail investors, getting into a fund is probably the best way of getting exposure to bonds. "Most investors don't have $100,000 or $250,000 sitting around to invest in the bonds of just one company," he says. "So funds are a good way of getting exposure." But mutual funds are not perfect. They do suffer from underperformance, depending on the skill of the manager. The other issue is that they charge relatively high management costs, ranging between 0.5 per cent and 1.5 per cent a year, depending on the asset class and the type of fund. A fairly recent type of fund, however, drastically lowers the costs of investing with the fund and mostly eliminates underperformance. Called exchange-traded funds (ETFs), they track indexes, both equities and fixed income, directly. This means that ETFs do not underperform the overall market, but neither do they overperform. Last year, iShares listed four new fixed income ETFs on the SGX which directly tap the Asian fixed income market. One is the iShares Barclays Capital USD Asia High Yield Bond Index. Its yield is 7.55 per cent and it charges a management fee of 0.5 per cent. It has returned 17.02 per cent since last December. Mr Gary Dugan, private bank Coutts' chief investment officer for Asia and the Middle East, says that ETFs should be seriously looked at as an alternative to pure bonds as they are both low-cost and easy to access. But Financial Alliance's Mr Tan notes that fixed income ETFs are subject to the vagaries of the market as they can be traded freely like stocks and shares. Asset management firm Franklin Templeton's director of retail sales for Singapore and South-east Asia, Mr William Tan, says that index products lose the ability to benefit from an additional source of returns through currency management. "In an actively managed fund, portfolio managers are more nimble and able to react to changing market conditions and they can adjust the duration of a bond fund as necessary," he says. High dividend stocks While income tends to be associated with bonds and fixed income instruments, experts also point out that high-quality dividend stocks can also form part of an income portfolio. Mr Dugan says that stocks should form part of any portfolio, even if it is income-focused. This is because some stocks pay higher dividends than bonds, while allowing for potential capital gains. One such hot type of stock is real estate investment trusts (Reits), which have soared roughly 30 per cent since the start of the year. Singapore Reits typically pay anywhere between 5 per cent and 8 per cent in distributions a year. Analysts are mixed on whether Reits are still good buys. Mr Dugan and Financial Alliance's Mr Tan believe they are fairly priced, given the rally over the past 10 months, and they are cautious about buying them. But UBS' Mr Tay says that one should buy Reits based on what they offer and not so much whether prices have risen. "It's really about quality rather than how much prices have run up by," he says. Outside of Reits, JP Morgan Asset Management's global strategist Geoff Lewis says that it is a good time to diversify into solid dividend-paying stocks. "We don't think it's too late in the day to get into the theme of income investing. In the current environment of low interest rates, high yields have thrived even while default rates remain low," he says. "We like firms that can pay a good starting dividend but with the potential to grow both their business and ability to pay good dividends." aaronl@sph.com.sg Get a copy of The Straits Times or go to straitstimes.com for more stories.

Pavilion REIT Chairman Lim reported to be worth RM3bil

Friday November 23, 2012

KUALA LUMPUR: Desmond Lim Siew Choon became a billionaire developing a high-end retail mall and an office tower in Kuala Lumpur, wooing Middle Eastern investors and listing the properties as a real estate investment trust.

The 52-year-old chairman of Pavilion Real Estate Investment Trust, Malaysia's second-biggest property trust by market value, is worth at least US$1bil (RM3.06bil), according to the Bloomberg Billionaires Index. Lim and his wife, Tan Kewi Yong, own 38% of the Kuala Lumpur-based trust, whose shares have outpaced other companies that raised at least US$50mil in an initial public offering (IPO) in Malaysia in the past 12 months.

Rising consumption and increased tourism in Malaysia have bolstered Pavilion REIT, which has surged almost 60% since trading on Dec 7. Malaysia's gross domestic product exceeded 5% for at least a fifth quarter as the Government raised spending and unveiled infrastructure projects before a general election that must be held by early 2013.

“While the general masses have benefited from this wealth effect, I would say that the upper crust would have seen the largest gains from the recent run up,” said William Chan, chief executive officer of Singapore-based family office Stamford Privee. “Connections matter, both locally and globally.”

Lim, who has never appeared on an international wealth ranking, declined to be interviewed as he was travelling for business, said Philip Ho, chief executive officer of Pavilion REIT Management Sdn, which manages the property trust.

Lim majored in finance at the University of Central Oklahoma, and started building houses, condominiums and office towers with developerKhuan Choo Group in the 1980s. As Malaysia prodded banks to merge, Lim took over the listing status of Gadek Capital Bhd after the latter sold its finance business to Hong Leong Bank Bhd in 2000. Lim injected Khuan Choo into Gadek, renamed it Malton Bhd and relisted it in 2002.

The billionaire made the bulk of his fortune from developing the mixed-use Pavilion project a mall, two luxury apartment towers and an office building on the former site of a girls' school in Kuala Lumpur, one of the last pieces of prime real estate in the capital.

Malton was the contractor of the Pavilion, located in the main shopping street of Jalan Bukit Bintang, Kuala Lumpur's version of Fifth Avenue in New York and Orchard Road in Singapore. In the heart of the city's Golden Triangle entertainment and commercial district, the mall, which drives the property trust's earnings, is surrounded by hotels including the Westin Kuala Lumpur and JW Marriott Hotel. Tourists account for more than 30% of Pavilion's shoppers. Malaysia attracted 24.7 million tourists last year, almost double the 12.7 million in 2001.

The mall, which has total net lettable retail area of more than 1.3 million sq ft, houses boutiques including Prada and Hermes alongside luxury-car showrooms offering the latest Jaguar and Bentley models. Other tenants include The Loaf, a Japanese-style gourmet bakery and bistro part-owned by former Malaysian prime minister Mahathir Mohamad, as well as an art gallery promoting the works of American pop artist Robert Indiana and contemporary painters.

According to a newsreport, when Lim embarked on the project around 2002, his entry cost was low with commercial and residential properties in downtown Kuala Lumpur transacting at less than RM500 per sq ft. Prices had risen more than three times to about RM1,800 per sq ft by the time it was completed in 2008.

There is an “increasing scarcity of prime land” in the capital's city centre, particularly in the Golden Triangle area, the research unit of Kuala Lumpur-based Alliance Investment Bank Bhd said in a report dated July 25.

Kuwait Finance House, the Persian Gulf state's biggest Islamic lender, helped to finance the development cost when it took a 49% stake in the Pavilion project in 2006 and bought both the residential towers. Qatar Investment Authority has since bought the stake from Kuwait Finance House and owns about 36% of Pavilion REIT.

Lim and his wife received about RM703mil in cash from selling their stakes in the Pavilion Kuala Lumpur Mall and the office tower to the trust before its initial share sale, according to Bloomberg calculations. They were also paid in equity and are the biggest shareholders in Pavilion REIT, along with Qatar's sovereign wealth fund.

“The turning point for him is through this development project,” said Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn in Kuala Lumpur. “He's been keeping a very low profile; not many people know much about him.”- Bloomberg

Funds from Operations (FFO) of REITS

What It Is:

Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement.

How It Works/Example:

The formula for FFO is:

Funds from Operations = Net Income + Depreciation + Amortization - Gains on Sales of Property

Let's assume Company XYZ is a REIT that owns several properties. Last year, Company XYZ's income statement looked like this:



Using the formula above, we can calculate Company XYZ's FFO as follows:

$2,500,000 + $2,000,000 - $200,000 = $4,300,000

REITs and similar trusts typically disclose FFO in the footnotes to their financial statements (and in many cases in the headlines of their press releases), and they are required to show their calculations.

Why It Matters:

In general, the adjustments FFO makes to net income are intended to compensate for accountingmethods that may distort a real estate investment trust's true performance. This is especially true ofdepreciation. GAAP accounting requires 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 AFFO (Adjusted Funds from Operations), which adjusts FFO for rent increases and certain capital expenditures.

Many analysts prefer to examine FFO instead of net income when measuring a REIT's financial performance. Similar to EPS (earnings per share), FFO per share is a carefully scrutinized metric that is often used as a barometer to gauge a REIT's profitability per unit of shareholder ownership. Meanwhile, the interpretation of price/FFO multiples may generate valuation insights similar to those generated by P/E multiples. As such, FFO is a key driver of share prices.

Though FFO is widely considered to be the most popular method of quantifying a real estate firm's profitability, it's important to remember that FFO can often be susceptible to manipulation, accounting changes, and restatements. Nevertheless, FFO remains the industry standard in determining investment-trust profitability for shareholders.

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/funds-operations-ffo-813

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