In Singapore, Real Estate Investment Trusts (REITs) have become a cornerstone of many investors’ portfolios.
However, with numerous REITs available, it’s crucial to understand which metrics are most indicative of a REIT’s performance and potential.
In this article, we will delve into the essential metrics to consider when evaluating REITs, equipping you with the insights needed to make informed investment decisions in Singapore’s dynamic real estate sector.
Note: for the purpose of this article, let’s take a closer look at the earnings report of Mapletree Industrial Trust (ME8U).
Table of Contents
Business Fundamentals
Occupancy Rate
Occupancy rate reflects the percentage of the REIT’s properties that are currently leased.
In general, a higher occupancy rate, the better; a high occupancy rate generally signals strong demand for the REIT’s properties and can be an indicator of effective property management and healthy cash flows.
On the flip side, a low occupancy rate may hint at challenges in attracting or retaining tenants, which could impact the REIT’s revenue and profitability.
Most investors consider occupancy rate as a key performance indicator and monitor this metric as it directly affects the REIT’s rental income and, consequently, its overall performance.
Weighted Average Lease Expiry (WALE)
WALE measures the average time that leases in a property will expire.
In Mapletree Industrial Trust’s case, it reported an overall portfolio WALE of 4.6. What this means is that the REIT’s current leases have an average of 4.6 years before they expire.
There’s no official yardstick used to determine what’s a ‘good’ WALE, and investors should not take the absolute value of this figure at face value when making an investment decision; a lower WALE doesn’t necessarily mean that the REIT is not a worthwhile investment.
For example, a REIT’s properties might be located in markets experiencing declining rents or high vacancy rates, and a long WALE might be masking potential issues with tenant renewals or re-leasing at favorable rates.
Rental Revision/Rental Reversion Rate
Rental reversion and rental revision rates, sometimes used interchangeably, show the change in rental rates when a new lease is signed or an existing lease is renewed. This change may result in a difference in agreed rental rates that affects a REIT’s rental income.
An increase in rental rates translates to positive rental reversion, while a decrease in rental rates means negative rental reversion for the REIT.
As an investor, you should look out for REITs with positive rental reversion rates, as this typically suggests a strong demand for the REITs’ properties.
Financial Health
Distribution per Unit (DPU)
DPU is the amount of money that an investor is entitled to per unit of REIT owned and is calculated by dividing the total distributable income by the total number of shares of a REIT.
To illustrate, imagine if a REIT distributes $10 million in total and has 50 million shares; the DPU is calculated by dividing $10,000,000/50,000,000 units = DPU of $0.20 per share.
For many investors, REITs are a way to get a steady income stream; a higher DPU means more income in your pocket, and for that reason, you’d ideally want to invest in a REIT with a higher DPU .
Additionally, DPU can be used as a performance indicator since it reflects the REIT’s ability to generate and distribute profits from its property portfolio. Consistently or growing DPU over the past few years may indicate a REIT’s stable or improving performance. On the other hand, it might be a red flag if DPU is declining or inconsistent.
In this example, Mapletree Industrial Trust has a DPU that’s been consistently growing. While it dipped in 2021, the REIT saw a rebound in its DPU that’s since been improving.
Net Property Income (NPI)
Net property income is calculated by subtracting the total property-related expenses from the total revenue of a property. This metric is used as a measure of the property’s ability to generate income and is used to gauge the financial performance of the property.
The net property income of most REITs can be found in their financial documents like their financial statements like the example above.
To determine the REIT’s NPI, zoom in on the row with ‘Net property income’ indicated; from the screenshot, we can see that Mapletree Industrial Trusts’ NPI grew 0.6% in Q1 FY24/25 vs Q4 FY23/24.
These reports will also usually state the reason for the worsening or improving performance of the REIT. Mapletree Industrial Trust, for instance, stated that their net property income increased due to lower property maintenance expenses from the Singapore Portfolio that were partially offset by the loss of income from the divestment of Tanglin Halt Cluster.
Gearing Ratio/Average Leverage
Average leverage, or more commonly known as gearing ratio, shows the ratio of a REIT’s debt to total assets. It provides insight into how much financial risk the REIT is taking on by using borrowed funds.
Understanding the gearing ratio helps investors gauge the level of risk associated with investing in the REIT. It’s important for assessing whether the REIT’s debt levels are manageable and if it can sustain its obligations.
An optimal gearing ratio usually falls between 25% to 50%, and in Singapore, REITs have a gearing limit of 45%
Debt Expiry Profile
The debt expiry profile outlines the maturity dates of a REIT’s outstanding debt. This includes everything from short-term loans to long-term bonds. It’s usually presented in a chart or table that breaks down when each portion of the debt is set to mature over the coming years.
Knowing the debt expiry profile helps you assess the risk associated with a REIT’s debt. If a large chunk of debt is set to mature in the near term, it might pose a refinancing risk, especially if market conditions are unfavorable. In contrast, a well-staggered debt maturity schedule can reduce this risk by spreading out repayment obligations.
Using Mapletree Industrial Trust as an example, this REIT has a well-spread debt maturity profile, with its longest debt maturing in FY38/39.
Investing in S-REITs
If you’re looking to gain diversified exposure to S-REITs, why not check out Syfe’s REIT+ portfolio?
Launched in partnership with the SGX, REIT+ is the first investment offering designed to closely replicate the performance of the iEdge S-REIT Leaders Index and is designed to you access to the largest REITs in Singapore.
This portfolio offers exposure to the top 20 SGD-denominated REITs and gives you the flexibility to choose between quarterly dividend payouts or automatic dividend reinvestment if you don’t need the extra income. Plus, you get to receive up to $100* in cash credits when you sign up as a sign user.
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