Value Investing in REITs by Attlee Hue Book Review and Summary

Value Investing in REITs by Attlee Hue Book Review and Summary

Value Investing in REITs book review:

Basically this book provides facts and figures comparison about REITs in Singapore. It will be good if you like numbers and understand how the various ratios relate to one another. Below is a summarised version which I find useful.

Summary of Value Investing in REITs book:

If I want maximum yield, I will go for REITs that generate highest yield at the expense of capital appreciation.
CapitaMall Trust and CapitaCommercial Trust, both have healthy capital appreciation and some yield.

Office REIT more cyclical and you will want a higher yield to compensate for this fluctuation.
Singapore retail REITs as being safest types of REITs. Industrial REITs are highly cyclical and you want higher yield to compensate for these cycles.

What does RevPar mean in the reports?
It stands for hotel revenue per available room.

Healthcare REITs like FirstREIT and Parkway Life REIT, have long-term leases but low capital appreciation.

Value Investors usually pay for REIT at price less than NAV.

Property Yield = Net Property Income x 100% / Property Valuation

A REIT may report a loss but this loss is really a book value loss, therefore it could still distribute returns to Unitholders.

Attlee will not invest in REITs with gearing more than 50%. The additional yield cannot be worth the risk.
If the gearing ratio (aka Debt to Equity Ratio) is more than 35%, check the credit rating of the REIT. Under Property Fund Guidelines of the CIS Code, aggregate leverage should not exceed 35% of the deposited property without a credit rating. This is because the total assets of the REIT may have depreciated resulting in the gearing exceeding 35%. Under this circumstance, the REIT need not obtain a credit rating but must cease any further borrowings.

Some of the credit agencies include Moody's, S&P and Fitch.

REIT Manager Pedigree
All REIT Managers in Singapore are incorporated companies. These manager companies themselves have their board of directors and shareholders. Not all the manager companies have the same parental pedigree. It is often helpful to find out who their shareholders are. You draw much comfort if the managers are owned by a substantial entity like Temasek or Capitaland or City Development. Often these same shareholders of the manager are also the largest unitholders of the REIT. This is not unexpected because often the REIT was formed in the first place by these companies moving their property assets into the REIT and then listing them.

In a financial crisis where the REIT has to raise funds to pay down its loans, a REIT manager financially well supported by a strong shareholder or a "big brother" can underwrite the rights issue. If the controlling unitholder of a REIT is a financially weak player, the REIT would be unlikely to undertake a rights issue.

It is better in the long run to opt for a REIT with a high property yield. As an inflation hedge, the larger the portfolio size, the closer the capital gains will track the inflation rate affecting the economy as a whole.

Before reaching any quick conclusion on gearing alone to consider other relevant indicators associated with the level of borrowing. This includes the credit rating, interest cover, amount of short term loan (due within the year), whether any loans are in default and even blended average cost of debt. Interest cover is how many times the earnings of the company for the year exceeds the interest payable for that year.

Avoid REITs whose REIT manager are not well-known. The challenge for REIT investors is not to identify REITs that will not come down when the market does since this is not possible. It is rather to identify REITs that will recover its price when the market eventually gets over the cycle and in the meantime continue to pay a consistent yield to its investors.

Investors Returns on the REITs = Distributions for the year (aka Dividends) / Value of REIT (aka Share Price of REIT)

Price Earnings Ratio (PE Ratio) are not used as valuation, because earnings of a REIT are often distorted by the annual property revaluations.

Value Investors Quick Tips
- Singapore retail REITs as being safest types of REITs.
- Value Investors usually pay for REIT at price less than NAV.
- Refrain from investing in REITs with gearing more than 50%.
- It is better in the long run to opt for a REIT with a high property yield
- Price Earnings Ratio (PE Ratio) are not used as valuation.
- Other factors to consider other than Gearing (aka Debt/Equity Ratio), are credit rating, interest cover, amount of short term loan, any default loan.
- Use Property Yields and Return on Equity (ROE) for comparisons if the numbers are fairly consistent.