Real estate investment trusts that can grow their distribution per unit over the long-term might make good investments.
To grow its portfolio of assets, a real estate investment trust (REIT) has to find new properties or improve its existing assets. But, to buy new properties will require the REIT to obtain capital. In this matter, a REIT has to either take on more debt or issue more units of itself to fund the purchase of new properties, online publication «The Motley Fool» writes.
And when it comes to borrowing, a REIT and its investors will have to take a look at its debt profile. A recent report from SGX (Singapore Stock Exchange) had helped to summarise the debt profiles of various REITs in Singapore. Here’re some interesting notes (data as of the first-quarter of 2016 unless otherwise stated):
- According to data from the REIT Association of Singapore (REITAS), the weighted average debt maturity level for the 27 REITs and six stapled trusts in Singapore’s stock market is 3.0 years. In general, a longer weighted average debt maturity is preferred as this is a sign that a REIT’s debt is distributed over a longer period of time, thus lessening risks when the need for refinancing comes. CapitaLand Mall Trust stands out here with a weighted average debt maturity of 5.3 years, the longest among the group of REITs and stapled trusts examined in the report.
- Meanwhile, REITAS data also showed the weighted average interest cost was 2.9 percent. A lower weighted average interest cost might be preferred here, as it means that REITs are paying less in interest to finance their debt. Parkway Life REIT trumps the rest of its cohort with a weighted average interest cost of just 1.5 percent.
- Low gearing levels might be another area of interest. A lower gearing level could mean that a REIT has the headroom to take on more debt to finance future acquisitions, and to face lower financial risks. SPH REIT, the owner of Paragon and Clementi Mall, rules the roast with a gearing level of just 25.7 percent.
- A REIT’s percentage of debt that is hedged or on fixed-rates might also be one more area of interest for investors. Having fixed-rate debt may help insulate a REIT’s future interest expenses from negative changes in the interest rate environment. Here, StarHill Global Real Estate Investment Trust tops the list by having 100 percet of its debt be either hedged or on fixed rates. Parkway Life REIT is not far behind with a 98 percent coverage.
The above are four quick financial metrics – the debt maturity level, the cost of debt, the gearing level, and the percentage of debt that is hedged or on fixed rates – that might interest the REIT investor, writes «The Motley Fool».