My Ultimate Guide To Picking the Best REITs

This article originated from sgstockmarketinvestor

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As most of you might know, I'm a huge REIT investor. I've written tons of analyses on REITs and I have over 40% of my portfolio in REITs alone. As such, I'm going to share with you all my ultimate guide to picking the best REITs.

With 41 REITs currently listed in the Singapore stock exchange, which ones should we buy? In this ultimate guide to picking the best REITs, we will look at the 7 steps I personally use to analyze a REIT before making that buy order. I'll be using Frasers Centrepoint Trust (FCT) as an example.

#1 Growth in Gross Revenue and Net Property Income

Taken from Frasers Centrepoint Trust's FY2019 Annual Report

FCT had declining Revenue and NPI from FY2015-FY2017 but picked it back up in FY2018 and FY2019. I typically like REITs that have consistently increased their Revenue and NPI. Even though FCT had a small decrease, the overall 5-year performance is still acceptable.

The latest FY2020 results were pretty shaky as well due to the pandemic but the drop was definitely expected. If not for the poor economic situation, FCT would have done well for the year.

Verdict: Pass

#2 Growth in Distribution Per Unit

Taken from Frasers Centrepoint Trust's FY2019 Annual Report

FCT has been able to consistently increase its DPU for the past 5 years. Moreover, if we take a look at their overall track record, we can see that they have been consistently increasing their dividends every single year with the exception of FY2011 and of course FY2020.

Note: The above picture was taken from StocksCafe.

Verdict: Pass

#3 Gearing Ratio Under 40%

Taken from Frasers Centrepoint Trust's FY2019 Annual Report

FCT has maintained their gearing ratio under 30% for the past 5 years with the exception of FY2019.

As of 31st December 2020, FCT's gearing ratio raised to 37.7% due to the recent PGIM ARF acquisition. Since the acquisition was fully funded by debt, the gearing went up quite a bit. Though it is a little high, it is still in an acceptable range and FCT has tons of room to acquire and grow in the near term.

Verdict: Pass

#4 Interest Coverage Ratio of Above 3x

As of 31st December 2020, we can see that FCT's interest coverage ratio is well above 3x, at 4.69x. Additionally, I also look at the cost of borrowing to determine if the management is being smart with their debt. As we can see from FCT's recent results, their cost of debt is very low at 2.2%.

Verdict: Pass

#5 Sponsor with A Good Track Record

A sponsor with a good track record can help skyrocket a REIT's growth potential exponentially. For example, CapitaLand Retail China Trust has over 20 China shopping malls they can acquire from Capitaland. REITs like Sasseur REIT or BHG Retail REIT don't have such a luxury to just acquire pipeline assets over from their sponsors. This is just one blocker to a REIT's growth potential. Another would be with a sponsor like Capitaland, they can buy/acquire these assets first and then pipeline them down later on to these REITs after it has matured.

Frasers Centrepoint Trust's sponsor is Frasers Property Limited, a well-known sponsor with a few other REITs under their wing such as Frasers Logistics & Industrial Trust and Frasers Hospitality Trust. The sponsor's track record is great and has a very healthy balance sheet with a current ratio 1 and an ICR 3x.

Verdict: Pass

#6 Fantastic Growth Prospects

As mentioned earlier on with the acquisition of the stake in PGIM ARF, we can see that there is a huge potential in growth for Frasers Centrepoint Trust. Post-acquisition, the REIT and its sponsor own a combined interest of 100% in PGIM ARF. This means that they can essentially buy over and acquire the entire fund including all of its assets. This will make PGIM ARF's assets part of the pipeline assets for FCT.

PGIM ARF's Assets

With the addition of these 5 malls into the pipeline, the potential upside for FCT is increased further.

Verdict: Pass

#7 Fair Valuation

Before making any buy order, it is important to buy companies at a fair valuation. Like what Warren Buffett says, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". So let's take a look at some of the valuation metrics I use when determining if a REIT is over, fair, or undervalued.

When valuating a fantastic REIT like FCT, I tend to give a higher allowance for what I deem as "fair valuation". A fair valuation would be a PB ratio of under 1.2x and a Dividend Yield of above 4.5%. When valuating REITs that I deem as a "value play", a fair valuation would be a PB ratio of under 1 and a Dividend Yield of above 6%.

Price to Book Ratio

FCT's last announced net asset value per share stands at $2.27. At FCT's current share price of $2.53, the Price to book ratio is 1.11x, which is lower than 1.2x.

Dividend Yield

Post-acquisition, FCT's projected distribution per share stands at $0.11987. At FCT's current share price of $2.53, the Dividend Yield is 4.74%, which is higher than 4.5%.

Verdict: Pass

Final Verdict

If I were to analyze FCT, I would give it a perfect 7/7 rating. It is a must-have in every REIT portfolio. Not to mention, FCT has the potential to do even better post-COVID-19 when the retail and tourism sector recovers. Though the dividend yield is not factoring in any dividend cuts, which will most probably happen, FCT would still score a 6.5/7 which is still fantastic nonetheless.

Final Tips

Just because you follow this "Ultimate Guide To Picking the Best REITs", doesn't mean that you will automatically do well and profit in the stock market. Ultimately, it's always important to understand what you are buying into. For example, If you are not very familiar with the industrial REIT sector, perhaps you can just buy the largest and safest one for diversification purposes. Better yet, you could just stay away from it entirely if you want to be safe. If you understand what you are buying into, you can accurately predict the REIT's upcoming cash flow and growth potential.

As always, you can take a look at my portfolio updates to see my current positions! Also, use my referral code for an extended 3 months of premium access to StocksCafe!