Following up on my last post regarding how credit ratings would play an impact on the Reits listed in Singapore, it is also important to look at other metrics that would determine your choice of the investment.
Using this post, I will also share on what factors that I feel it is important to look at before deciding to invest in the Reits. Note that this is my personal choice of factors so yours can be different.
This is the ratings based on what I have discussed in my previous post. As you can see, most of the reits are in the B range ratings while more notable CMT and Ascendas Reit are in the A range. For the investors, people may tend to overlook this factor but for the management of the Reits, this becomes a very important factor. For example, if you drop to a no rating, your cap for the gearing allowed by MAS would only be 35% as compared to others at 45%. There are other repercussions beside this as well.
Costs of debts
This is the average all in costs of the debts they currently have outstanding. As you can see, some of the more recent listed Reits such as MGCCT and SPH Reit managed to get it down at the lower 2+% range as compared to others who are in the higher range. This factors are important as it will impact the reits bottomline earnings and ultimately your DPU. Surely you would want to keep this as low as possible.
% of Fixed Debts
With impending news that FED tapering will finally be here, it is important for Reits to lock down the amount of fixed vs floating interest rate early, lest the uncertainties. For example, Croesus and FCT have locked it down 100% and 75% of their fixed debts at 2.15% and 2.49% respectively. This will ensure no surprises to the earnings when management are doing their budget. And investors will ensure that your DPU will not be impacted too much by the volatility of the interest rates.
Interest Coverage Ratio
Linking this back to the Interest Coverage Ratio, this factor is determined by using the NPI / Finance expenses. The greater the ratio, the better the ability of the company to repay its debt. Companies like Plife Reits leads the charge at 10.4x interest coverage ratio!!! Incredible.
Last but not least, it is important to look forward at the debt maturity profile to ensure that the company has no short term obligation to refinance their debts. If there is, then it is imperative that the company needs to be able to refinance it at low interest rates to not impact their earnings distributions.
When I choose Reits to invest, I usually use a few metrics that I take a closer look at.
1.) DPU Growth – I like to see how the management grow the company’s bottomline from the past to present. Most of the listed Reits here will have no issue regarding this.
2.) Short-term catalysts – I look for Reits that have potential short term catalysts as this will mean re-ratings from analysts that will positively impact the shares. For e.g FCOT will have a rental reversion from its Alexandra office which expires in Aug this year. What this would mean is the next few results would see them doing better than previous year and hence this would enable positive re-ratings.
3.) Costs of debts and debt maturity profile – I like companies that have an all in costs of around 2.5% and below. For companies with a higher costs of debts, the yield would have to compensate even much higher.
There isn’t really a hard and fast rule as to what metrics you should look at when investing in Reits. With companies balance sheet doing much better now as compared to GFC period, I do not see the yield to shrink much even at times of higher interest rates. As always, do your homework and make sure you can justify your investment.