What to take note of when investing in REITs - Part 1

This is part 1 of a series that shares about what to look out for when investing in REITs.

Readers of my blog will know that I am generally fond of REITs for their distribution payouts and preference for an income investing strategy, making them a popular component (and in some cases, predominantly so) of one's portfolio. Here are some areas to look into when studying REITs to invest in.

Property Portfolio / Sector
REITs holds properties that could be industrial, logistic, hospitality, commercial and/or retail in nature. Some of the sector could be defensive in nature (Retail). Some of these sector could be cyclical in nature, affecting the performance of the share, both in distribution and in capital gain. And among the properties in the portfolio, they vary in their performance; some of the properties in the portfolio could generate more value than others and the REIT will monitor these and make changes from time to time (as we do for stock portfolio reviews).

Debt Financing
Part of how REITs finance their operation are done by loan facilities. This leads to the need to pay attention to Interest Coverage Ratio and the debt maturity profile. Examples from Cache Logistic Trust is shown just below:

Source: Cache Logistic Trust

With the interest rate hikes, investors who are looking at REIT will want to take note how the interest may be hedged (how much of the financing is on fixed rate) or how much change is there in the interest rate during refinancing. Here is also an example from Cache Logistic Trust which shows the projected change in Pro Forma DPU after refinancing.

Source: Cache Logistic Trust

Gearing Ratio
SGX-listed REITs can only have gearing ratio up to 45%. Past this, financing by debt is no longer an option; the REIT will have to look into other means of fundraising such as divesting assets, issuance of new shares (rights issue, placements, etc), causing dilution (usually).

Having said that, high gearing may not be a bad thing so long as that is able to create value to their shareholders and shareholders should evaluate if this matches their risk profile.

Part 2 of the series will be coming soon!