Thinking of buying REITs? Check these 3 signs first

Historically, owning physical property seemed like a good bet to weather a downturn.

After all, the whole idea of investing in property is that it’s supposed to hold its value through economic cycles.

However, the Covid-19 pandemic has thrown up some unwanted surprises for Real Estate Investment Trusts (REITs).

Hospitality REITs have suffered a painful decline in gross revenue and Net Property Income (NPI) as air travel is curtailed and lockdowns are implemented.

Commercial REITs face an uncertain future as more companies implement telecommuting arrangements and look to downsize the amount of space they rent to further cut costs.

And retail REITs, which had been recognised as one of the more stable sub-sectors of the REIT universe, saw visitor footfall drying up and tenant sales under pressure as movement restriction orders kept people at home.

Distribution Per Unit (DPU) was slashed for many prominent retail REITs.

As it stands, choosing a good REIT to invest in probably felt like you were wading through a minefield.

However, if you look more closely, you will find a couple of resilient REITs that have nimbly weathered the downturn so far.

Here are three qualities you should watch out for in such REITs.

Diversified tenant profile

REITs with a well-diversified list of tenants can mitigate downturns much better as less reliance is placed on any single tenant.

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Investors should look at REIT presentations to assess the weightage of their top 10 tenants and how much these tenants contribute to its Gross Rental Income (GRI).

The more diversified its tenant base, the better the REIT can withstand sudden, unexpected shocks.

Take Frasers Logistics and Commercial Trust (FLCT) for instance.

The REIT had just completed a merger with Frasers Commercial Trust this year and now owns a portfolio of 100 properties across five countries, valued at around $6 billion as of June 30.

FLCT has a well-diversified portfolio of both industrial and commercial tenants, with the top 10 tenants comprising 23.3 per cent of its GRI.

In fact, no single tenant accounted for more than 4.7 per cent of the portfolio’s GRI.

At the same time, the majority of portfolio tenants consists of government or related entities, multi-national corporations, conglomerates and listed companies.

These types of businesses are generally better-capitalised and more resilient during downturns.

FLCT’s share price has performed well year to date, up 10.6 per cent compared to the 22 per cent decline in the benchmark Straits Times Index.

Long WALE

Another useful attribute to watch out for is the REIT’s Weighted Average Lease Expiry (WALE).

In a nutshell, a longer WALE provides more certainty for unit holders as it means that leases are locked in for longer periods, providing a stable stream of rental income.

The risk in having a short WALE is that during downturns, tenants may pressure the REIT to lower rental rates to provide them with some breathing room.

As a result, the REIT may experience negative rental reversions and DPU may correspondingly fall.

For Keppel DC REIT, a REIT that invests in a portfolio of 18 data centres across eight countries, it has a long WALE of 7.4 years by leased area.

As of June 30, only 8.8 per cent of the REIT’s leases are up for renewal till end 2021. The bulk (79.5 per cent) of leases are only due for renewal in 2025 and beyond.

Keppel DC REIT has performed well, with its share price up 38.5 per cent year to date.

Resilient sector

Finally, you should keep an eye out on the sub-sector that the REIT is invested in.

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Resilient sub-sectors are the ones that run essential services that are allowed to continue operations despite the pandemic.

One example is Parkway Life REIT. The REIT owns a portfolio of 53 properties consisting of private hospitals in Singapore and nursing homes in Japan.

Parkway Life REIT reported stable operations throughout the Covid-19 outbreak.

For the first half of 2020, gross revenue was up 5.1 per cent year on year while DPU inched up 1.9 per cent year on year.

Shares of the REIT have also outperformed the benchmark index, and are up 16.9 per cent year to date.

This article was first published in The Smart Investor. Disclaimer: Royston Yang owns shares in Frasers Logistics and Commercial Trust and Keppel DC REIT.