4 Important Factors You Need to Know for Your REITs

2020-07-08     thesmartinvestor
4 Important Factors You Need to Know for Your REITs

We are already in the middle of April and May is coming around soon.

It will soon be earnings season again for companies.

A few of the REITs, such as CapitaLand Mall Trust (SGX: C38U), have opted to stick with quarterly reporting.

Other prominent REITs, such as Frasers Centrepoint Trust (SGX: J69U) and Mapletree Commercial Trust (SGX: N2IU), will be reporting its half-year 2020 and full-year 2020 earnings respectively, in due course.

By now, hardly any companies or REITs can claim to be immune from the pernicious effects of the COVID-19 pandemic.

Here are four key aspects to watch out for when REITs report their earnings.

Occupancy rate

The occupancy rate is a key operating metric for a REIT. This metric tells investors what the level of vacancy is throughout the REIT’s properties.

For hospitality REITs, this metric is of particular importance as COVID-19 has hit the hotel industry hard.

Many hotels have reported sharp plunges in room occupancy all around the world.

A low occupancy rate means that the REIT is unable to generate enough rental income. By implication, that could mean that the REIT’s distribution per unit (DPU) will be reduced.

For retail, commercial and industrial REITs, a declining occupancy rate (compared on a year on year basis) implies that more tenants may be giving up their leases due to an inability to generate sufficient cash flows.

In short, a lower occupancy rate (i.e. higher vacancy rate) does not bode well for a REIT.

Rental reversion

Rental reversion describes the change in the average rental rates the REIT is achieving across all its tenants.

Positive rental reversion implies that tenants are paying more than they did a year ago.

The pandemic has depressed demand for office, industrial and retail space.

Higher vacancy rates will push up the total supply of available space.

Based on the law of supply and demand, rental rates should, therefore, come down as supply surges.

Investors should look for signs of negative rental reversion, as well as the magnitude of such reversions.

Distribution per unit

For income-driven investors, DPU is one of the most important aspects to scrutinise.

A sharp drop in rental revenue would flow down to lower distributable income.

As REITs have to pay out at least 90% of their earnings as dividends, lower income levels will lead to lower payouts for unitholders.

A precedent has already been set. SPH REIT (SGX: SK6U) had slashed its DPU by nearly 80% in early April.

Other REITs are almost certain to follow suit.

The question now is the magnitude of the DPU cut, and how long this will persist.

Commentary on future prospects

Finally, investors should keep an eye out for the management discussion and analysis (MD&A) section of each earnings release.

Most REITs include a press release and presentation slides along with their financial statements.

The MD&A should cover the COVID-19 impact on the REIT, the current state of the industry, and management’s view on how long the challenges will persist.

These facts will provide investors with a clearer picture on the scale of the problems and how management is taking actions to mitigate their impact.

Get Smart: Monitor the health of your REITs

It is the responsibility of each investor to monitor the underlying health of the REITs within their portfolio.

Though REITs are viewed as stable, income-generating securities, they are not immune to downturns caused by economic crises and pandemics.

COVID-19 has been unprecedented in its impact and there is no recent history to compare with.

Investors, therefore, need to be vigilant in assessing how each REIT is impacted.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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