REITs Screening Criteria I

It is no secret that I am a fan of REITs. For me, the great thing about this class of assets is that I get to enjoy regular and predictable distributions in most cases, barring any extraordinary circumstances. However, what the recent credit crisis has done is it has exposed the weaker REITs for their ability to secure financing and ultimately, the fallabilities behind the management of their debt profiles.

As a retail investor, I have thus learned that I have to screen my buys stringently to protect my own interests. Below is my newbie attempt to establish a set of criteria to determine which REITs to buy for stability and for value-for-money:

Stability

1. Low gearing, i.e. < 35% (also the limit for REITs without a credit rating)
2. Presence of a sponsor, preferably a strong one, eg. Capitaland, F&N, etc
   
3. Portfolio mainly in Singapore, as I will have a local knowledge of the industry in that case

Value-for-money

1. Discount to NAV, i.e. paying less for more
2. High yield, preferably > 8% p.a.
3. Quarterly distributions (as opposed to semi-annually), this is just a personal preference to improve my own cash flow

After Saizen had set the precedent of suspending its distributions to conserve cash for paying off debts, I typically ascribe the most importance to the gearing criterion. Having a sponsor can be argued both ways, it can bail the REIT out in times of trouble, but it can also dump its own rubbish into the REIT. Reading about the efforts of F&N with regards to FCOT which it took over, I choose to believe the former rather than the latter. Despite the general penchant that Singaporeans have of complaining about their own country, I actually think Singapore is a stable country to do business in and hence have no issues with REITs having the majority of their portfolios here. Discount and yield are somewhat related since they are based on the share price, here TA is extremely helpful in determining good entry levels.

When I decide to enter into a counter, I settle for nothing less than 5 ticks. Of my holdings, 4 out of 5, with the exception of FCT, still pass my screening at current levels. Additionally, AIMSAMP after their recapitalisation exercise and the two Indo-based REITs, First and LMIR, fulfill the majority of my criteria and are on my watchlist.

As always, I am constantly seeking to refine and add on to my screening criteria and appreciate any inputs from friends and well-wishers, cheers!