Growth Potential
A) Organic Growth potential
Organic growth via rental reversion means ability
to increase rents and occupancy rates over time. Demand and supply dynamics
within the property segment will affect the scope of rental reversion upon
lease renewals, impacting the Reit’s ability to grow its dividend.
to increase rents and occupancy rates over time. Demand and supply dynamics
within the property segment will affect the scope of rental reversion upon
lease renewals, impacting the Reit’s ability to grow its dividend.
E.g. Fraser Commercial Trust has a master lease of 511,000 sqft at Alexandra
Technopark (ATP) expiring in Aug 2014 successful renewed. Current rent for
mater lease is $1.8 psf per month compared to the underlying rate of S$3.4psf
per month. Therefore the upward rental reversion is expected to post good organic
growth in FY15 and onwards
Technopark (ATP) expiring in Aug 2014 successful renewed. Current rent for
mater lease is $1.8 psf per month compared to the underlying rate of S$3.4psf
per month. Therefore the upward rental reversion is expected to post good organic
growth in FY15 and onwards
B) Asset Enhancement Initiatives (AEI)
Instead of acquisition for growth, Reits can also
undergo AEI to increase their Net Lettable Area (NLA) and improve their rental
income from the new look.
undergo AEI to increase their Net Lettable Area (NLA) and improve their rental
income from the new look.
E.g. Suntec Reit had undergone a > S$400mil AEI since 2012
to be completed in four phases up to 2015. After AEI, NLA will increase by 14%
(1mil sqft) and rent is projected to rise +25% per sq ft per month.
to be completed in four phases up to 2015. After AEI, NLA will increase by 14%
(1mil sqft) and rent is projected to rise +25% per sq ft per month.
AEI is normally for Reits that have portfolio of
older assets. A portfolio of relatively new assets may see limited room for
further asset enhancement thus capping the rental growth potential.
older assets. A portfolio of relatively new assets may see limited room for
further asset enhancement thus capping the rental growth potential.
C) Inorganic Growth
Inorganic growth is acquisition from 3rd party
or sponsor. A strong sponsor or strategic partnerships potentially offers
pipeline of assets to acquire. While inorganic growth increase its portfolio
and net asset over time, it also put burdens on balance sheet or may have
dilutive effect in its share resulted from raising capital via placements or
rights.
or sponsor. A strong sponsor or strategic partnerships potentially offers
pipeline of assets to acquire. While inorganic growth increase its portfolio
and net asset over time, it also put burdens on balance sheet or may have
dilutive effect in its share resulted from raising capital via placements or
rights.
Inorganic growth is normally funded by i) issuing
of debt via Fix Rate Note via companies MTN programme to accredited investors;
or ii) via rights issues of placement of shares.
of debt via Fix Rate Note via companies MTN programme to accredited investors;
or ii) via rights issues of placement of shares.
E.g. AIMS AMP Capital Industrial REIT issue rights in Feb to raise gross proceeds of
approximately S$100.0 million. In May its raises another S$50 million by
issuing 3.80% Fixed Rate Notes due 2019 mainly for acquisitions or
re-developments.
approximately S$100.0 million. In May its raises another S$50 million by
issuing 3.80% Fixed Rate Notes due 2019 mainly for acquisitions or
re-developments.
Size Matters
Larger cap REITs usually are more diversified in
investor base as well as portfolio of assets. With a larger investor base and
portfolio of assets, share price is less volatile.
investor base as well as portfolio of assets. With a larger investor base and
portfolio of assets, share price is less volatile.
Larger Reits normally also has easier access to
institutional investors. Exposure to institutional investor also means
likelihood to benefit from a rise in shareholding interest
institutional investors. Exposure to institutional investor also means
likelihood to benefit from a rise in shareholding interest
Foreign Currency
Overseas Reits such as Lippo Malls Indonesia Retail Trust (Rupiah), Croesus, Saizen Reits (Yen), Fortune Reit (HKD) have income denominated in foreign currency.
Foreign currency is affected by the political or
economic situation of the country. For instance LMIRT, due to Indonesia Election and Indonesia budget
deficits, Rupiah has been depreciating and profits in S$ declines even when
operation income increase.
economic situation of the country. For instance LMIRT, due to Indonesia Election and Indonesia budget
deficits, Rupiah has been depreciating and profits in S$ declines even when
operation income increase.
For the case
of Fortune Reit, it is
different because its share price is also denominated in HKD. Therefore any
volatility in exchange rate is already accounted for in its share price.
of Fortune Reit, it is
different because its share price is also denominated in HKD. Therefore any
volatility in exchange rate is already accounted for in its share price.
Weighted Average Lease Expiry (WALE)
WALE is a tool to assess the likelihood of
properties left vacated. When Reits property is left vacant for too long,
property income and distribution to shareholders will be affected.
properties left vacated. When Reits property is left vacant for too long,
property income and distribution to shareholders will be affected.
Reits with long WALEs face the least risk of
vacancy and vice versa. A long WALE is typically 5 years or more while 1 to 4
years is consider shorter WALE. Longer WALE is considered less risky normally
committed by anchor tenants such as government agencies or MNC, while shorter
WALE is usually for smaller businesses and possess risk of non-rental renewals.
vacancy and vice versa. A long WALE is typically 5 years or more while 1 to 4
years is consider shorter WALE. Longer WALE is considered less risky normally
committed by anchor tenants such as government agencies or MNC, while shorter
WALE is usually for smaller businesses and possess risk of non-rental renewals.
Having said that, if the Reit had potential upside
in rental reversion in a strong sector outlook, having a long WALE may not
necessary be of good cause since it rents are fixed over a long period of time.
in rental reversion in a strong sector outlook, having a long WALE may not
necessary be of good cause since it rents are fixed over a long period of time.
WALE can be greatly skew due to the anchor tenants
occupying large areas and signing very long leases at a competitive low rental
rates. E.g.
occupying large areas and signing very long leases at a competitive low rental
rates. E.g.
Tenant 1: Occupies 10% of NLA (lease
expires in 5 years)
expires in 5 years)
Tenant 2: Occupies 70% of NLA (lease
expires in 6 years)
expires in 6 years)
Tenant 3: Occupies 20% of NLA (lease
expires in 3 years)
expires in 3 years)
WALE is (0.1 x 5) + (0.7 x 6) + (0.2 x 3) = 5.3
years.
years.
As can be seen above, tenants that occupy the
larger spaces in a property and sign on very long leases in the building can
greatly skew WALE upwards. The large WALE at low rental may mean a loss of
opportunities for upward rental reversions if sector outlook in the future is
bright.
larger spaces in a property and sign on very long leases in the building can
greatly skew WALE upwards. The large WALE at low rental may mean a loss of
opportunities for upward rental reversions if sector outlook in the future is
bright.
So if robust internal income growth is your
preference, REITs with long WALE may not exactly work in your favour. But if
you are after predictability and stability of income, REITs with longer WALE
may be your best bet.
preference, REITs with long WALE may not exactly work in your favour. But if
you are after predictability and stability of income, REITs with longer WALE
may be your best bet.
Conclusion
- Management Team. One with good track records
- Strong
Sponsors with financial backing and assets for acquisition - Quality
of Assets. Healthy dynamics, good locations and good tenant mix - Strong
Balance Sheet. Consider Gearing, Debt Headroom, Dividend, NAV - Growth
Potential. Rental reversion, AEI, Acquisitions - Size
Matters. Diversified investor base and portfolio of assets. - Foreign
Currency. Affected by political and economical situation of the
countries. - Lease
Expiry. Longer WALE reduce vacancy risk but its overall benefits depends on sector
outlook and personal investment style.
In your view, which are the reits with strong management track records?
Thanks for sharing.I found a lot of interesting information here. A really good post, very thankful and hopeful that you will write many more posts like this one.
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