News

Jerome Powell has finally uttered the magic words. As someone who has over the past few years, this does point to a light at the end of the tunnel. Most REITs would have rebounded on Monday morning’s opening, indicating that the bottom has clearly formed, and the best time to buy the bottom would be probably 1-2 weeks back. However, rather than cry over spilt milk or enter the next FOMO phase, its worth noting that many REITs are still far from their peak prices. The first few rate cuts could potentially start a new virtuous cycle for REITs. Not only will fair value gain from property valuation improve, boosting net asset value per unit, but . So which are the top REITs to keep an eye on? Let’s start with what a top REIT is. There are many moving parts and factors that make a REIT stand out against its peers. And everyone’s definition of what a is can differ, with no right or wrong answer. Some investors put more reliance and emphasis on great price, valuation and distribution. I lean more towards the qualitative spectrum. REITs play a defensive role in my portfolio. It serves as an anchor to my portfolio, ensuring the total NAV does not sway too much. So my definition of a top REIT would mainly hinge on having a strong and reputable sponsor, a large market cap, above-average ratios, prudent debt management and a solid track record of growing NAV and DPU per unit. The bedrock and pride of the S-REIT cohorts. The past 2 years have been a watershed period for REITs. We’ve seen REITs beaching financial covenants, subscribing to high-yield bonds and facing high-profile tenant defaults. If there’s one S-REIT that remained steady, it would be . Backed by and Temasek, CICT is the largest REIT listed on SGX and one of the largest in Asia. With a concentrated portfolio primarily consisting of Singapore properties, along with a presence in Germany and Australia, the merger between CapitaLand Mall Trust and CapitaLand Commercial Trust has strengthened CICT. Sporting some of the best retail and commercial properties, CICT has shown resilience even during the high interest rates period. Leverage remains healthy at 39.8% as of recent updates, and it also sports an above-average interest coverage ratio of 3.0x. Unless we see signs of severe economic slowdowns, the rate cuts should benefit this steady REIT and propel it up more. MPACT is a controversial choice. 2 years after the merger with MNACT, international properties are facing fewer headwinds. I feel that the worst is over, but investors’ sentiments about properties in Hong Kong are still pessimistic. Its host of Singapore properties continues to deliver growth YoY. NAV per unit has been growing steadily, while DPU grew at a lesser rate due to multiple rounds of preferential offering over the last 10 years. With Mapletree also having Temasek as its major shareholder, I have fewer concerns about a significant underperformance. The rationale for including MPACT, from a quantitative perspective, is that the Singapore property portfolio’s total valuation is S$8.35 billion. With the latest number of units in issue at 5.253 billion, that gives a net asset value per unit of $1.59. By just paying the market price of $1.36 as of the time of writing, you are getting $1.59 per unit worth of Singapore properties, plus the other properties for free. Those who see a rate cut as a potential curb on spending would find solace in . During the pandemic period, FCT was one of the REITs that delivered solid results, thanks to its extensive portfolio of suburban malls. While high-end malls were suffering, FCT was flourishing. With lacklustre sales reported by companies in the discretionary business, FCT could weather through the uncertainties. FCT might be smaller in size compared to its peers, but that does not mean it is inferior. Its sponsor is . Its latest aggregate leverage is at 39.1%, sporting an interest coverage ratio of 3.26x. NAV per unit has grown over the past 10 years. DPU per unit has grown as well, albeit slower due to a few rounds of capital-raising exercises. It currently trades at 1.04x price to book and offers a trailing dividend yield of 5.1%. Not exactly dirt cheap, but considering the quality, I’d say it’s quite a bargain. If there is a REIT subsector that is cyclical, it would be the healthcare REIT. And REIT investors would quickly think of . PLife REIT owns investment properties that are leased out as hospitals, healthcare centres and nursing homes. Due to the complexity and requirements of the healthcare business, most, if not all, of their operating leases are renewed perpetually. Their properties usually have close to 100% occupancy and a long weighted average lease to expiry with built-in rental hikes. Even though Plife REIT might not be active on the acquisition front, its rental revision over the years has provided it with uninterrupted recurring DPU growth ever since its IPO. To top the cherry off the cake, PLife REIT boasts an impressive interest coverage ratio (ICR) of 13.8x and a gearing of just 36.4%. It is definitely the epitome of what a world-class REIT is in terms of performance and track record, even though it might not be the largest REIT. Due to its strong track record and resilience, the REIT trades at a relative premium, at a price-to-book ratio of 1.57x and a dividend yield of just 4.1%. How could I ever miss out on a data centre REIT? Not all data centre REITs have recovered from the previous correction, but is one that has rebounded by more than 20% from the bottom. Although DPU is lower year-over-year due to a loss allowance for the REIT’s data center in Guangdong China, and higher finance costs, these issues could be temporary and one off. Its contract is mainly colocation and shell & core arrangements. Tenants on colocation are equipped with the basic data centre infrastructures. Leverage is at 35.8%, down 180 bps from preceding quarter. Interest coverage ratio is strong at 5.1x. The only thing to nitpick is its steep valuation – it trades at a 31.4% premium to its net asset value per unit, and sports a dividend yield of just under 4%. As the rate cuts come, they will undoubtedly be a boon for REITs. You might wonder, why not feature REITs that are currently under water? Wouldn’t a high dividend yield and low price to book ratio REIT recover and provide better returns? While you are not wrong to ask so, my definition of a top REIT is a defensive and a prudent one. I run a diversified portfolio. If I am aiming for higher returns, other stocks can provide that with lesser risk or potential for implosion. No doubt, there are plenty of deep value REITs waiting to recover as the tide comes back in. But for someone who plans to hold their holdings for a long period of time, I want to minimise the likelihood of unfavourable circumstances. That is why my top REITs have a strong sponsor, a proven track record of holding the fort when times are tough, and an eye for growth when the time is right. Simply put, I wouldn’t be looking at different REITs even when there is are changes in economic outlook or interest rate gyrations. Because while form can be temporary, class is permanent! READ MORE READ MORE