invest in reits · •reits are listed via ipos and traded like any ordinary securities in the...

INVEST IN REITs BUILDING A GLOBAL PORTFOLIO OF PRIME REAL ESTATE

BY PC WONG

DISCLAIMER

The views by the author are his alone. All opinions expressed by the author are subject to change. The viewer is not to assume the performance of any company shares will equal its past performance.

Use of information contained in this presentation does not constitute any contractual relationship between the viewer and the author. The author hereby disclaims all responsibilities and liabilities for any use of information contained in this presentation.

The author’s risk assessment may differ from the viewer's. Risks are subject to economic uncertainties and market conditions.

Viewers are advised to exercise due diligence and do their own assessment of the risks involved when investing in any company. Viewers shall not hold the author liable for investments which have gone sour.

Do seek the advise of a financial advisor if you so require.

All rights reserved by Jupiter Consultancy Sdn Bhd. Any unauthorised copying or distribution is deemed an infringement under the Malaysian Copyright Act 1987

CHARACTERISTICS OF REITs • REIT = Real Estate Investment Trust

• Assets which are backed by securities are called REITs

• The assets can be commercial or residential properties, infrastructure or transportation assets

• REITs are listed via IPOs and traded like any ordinary securities in the stock exchange

• REITs must distribute at least 90% of their net income to unitholders

• REITs gearing is regulated:

Singapore < 35%

< 60% if rated by S&P, Fitch, Moody’s, etc

Hong Kong < 40%

Malaysia < 50%

NOT AL REITs GEARING AND DISTRIBUTION ARE REGULATED


HOW DO REITs GAIN IN PRICE

• REITs assets are hard assets. As the value of hard assets gain, income from the rental of the hard assets will also gain. Any increase in the value of hard assets and income distributed to the unitholders will result in an increase in the REIT’s unit price

• REITs acquired more assets

More rental income

Increase in distribution income

Increase in price per unit


ATTRACTIVENESS OF REITs • Steady income stream with yields above FD rate

• Appreciation in value over the long term as company accumulate new assets

• Low barrier of entry. You invest within your means

• High liquidity - easy to invest and exit

• Opportunity to own a piece of prime real estate in any parts of the world and participate in its growth story

• Most REITs are regulated, thus offering some measure of investment security

• Lower volatility vs stocks in times of turbulence

REITs are ideal for new investors, retirees and middle income earners who wants to invest over the long term


REITs DISTRIBUTION INCOME & TAXATION FOR NON-CORPORATE ENTITY


Source: www.pwc.com.sg

COUNTRY DISTRIBUTABLE TAXATION REMARKS

INCOME

TO QUALIFY

MALAYSIA 90% 10% Withholding tax to individuals

SINGAPORE 90% Individuals are exempted from tax

HONG KONG 90% Individuals are exempted from tax

JAPAN 90% 15.315% + 5% Withholding tax + local tax for

non-resident individuals

SOUTH KOREA 90% 22% Withholding tax for non-resident

individuals

AUSTRALIA Unspecified 30% Withholding tax for non-resident

individuals

UK 90% 20% Withholding tax to individuals

CANADA Unspecified 25% Withoholdng tax to non-resident

individuals

US 90% 30% Withholding tax to individuals

GERMANY 90% 26% Withholding tax to individuals

FRANCE 85% 30% Withoholdng tax to non-resident

individuals

TYPES OF REITs IN THE MARKET • Types of assets among REITs in the market

- Shopping malls (Retail REIT) - Office blocks (Office REIT) - Warehouses and distribution centres (Logistic REIT) - Industrial Buildings (Industrial REIT) - Hospitals and healthcare centres (Healthcare REIT) - Hotels and resorts (Hospitality REIT) - Shop houses (Retail REIT) - Ships (Transportation REIT) - Campuses (Education REIT) - Toll highways, water and energy plants, broadband (Infrastructure

REIT) - Mortgage REIT

• REITs which consist of several types of asset class are called Hybrid REITs


TYPES OF REITs IN THE MARKET • Types of assets among REITs in the market

- Shopping malls (Retail REIT) or Shop houses (Retail REIT) - Apartments (Residential REIT) - Office blocks (Office REIT) - Warehouses and distribution centres (Logistic REIT) - Industrial Buildings (Industrial REIT) - Hospitals and healthcare centres (Healthcare REIT) - Hotels and resorts (Hospitality REIT) - Ships (Transportation REIT) - Campuses (Education REIT) - Toll highways, water and energy plants, broadband (Infrastructure

REIT) - Mortgage REIT

• REITs which consist of several types of asset class are called Hybrid REITs


MORTGAGE REIT • Popular in US

• A Mortgage REIT borrows money from the market or issue new units, then with the capital raised, lend it out in the form of a mortgage

• Pay very high dividends but is extremely risky

• Make money from the spread between interest charged via debt issues vs interest earned from the mortgages

• Frequent raising of capital via new issues - results in dilution

STAY AWAY FROM MORTGAGE REITs IF YOU ARE NOT FAMILIAR


TIPS IN SELECTING REITs • Perpetual demand for properties driven by scarcity of land. Example: New

York City, Hong Kong and Singapore

• Major cities with high population growth: Montreal, Melbourne, London, etc

• Major gateway to the greater continent or financial and transport hub. Examples: Hong Kong, Singapore, Frankfurt, London, etc

• Proximity to transportation hubs and ports. Ideal for REITs in warehousing and distribution centres

• Economies with strong tourism growth. Ideal for Hotel and Resorts REITs

• In a monopoly market or in a market with few major players such as infrastructure and energy

• Economies with good prospect for healthcare development due fast aging population and expanding middle class: China, India and Japan


STEPS IN SELECTING A REIT • Go for the highest yield. Singapore and HK REITs are tax free. Whichever the

choice must be more than current FD rate. Mortgage REITs in US offers high yields but are more risky

• Analyse the financials to ascertain the REIT’s potential growth and financial strength to endure the ups and downs of an economy cycle

• Important to a have set of KPIs. KPIs should be based on your own risks assessment in the current economic environment

Your set of KPIs is your acknowledgement and acceptance of the risk levels

• Benchmark the REIT with other similar REITs in the market

• The BUY decision is based upon the REITs fulfilment of the KPIs and out performance over the other REITs


APPLY THE M-A-R-K-E-T PRINCIPLES • Measurement

• Assessment

• Research

• KPIs

• Execution

• Target


ANALYSING REGAL REIT FINANCIALS FY2014 vs 2013


Revenue HK$469,310M in 2014 vs HK$415,309M in 2013

Net Profit (with property gains) HK$319,609M in 2014 vs HK$335,408M in 2013

Net profit (without property gains) HK$245,645 in 2014 vs HK$210,615M in 2013

Current Assets HK$1,147,811M

Non Current Assets HK$22,749,000M

Total Assets HK$23,896,811M

Current Liabilities HK$648,395M

Long Term Borrowings HK$6,997,782M

Other Non Current Liabilities HK$425,199M

Total Liabilities HK$7,422,981M

Total Equity HK$15,825,435M

IMPORTANT KPIs FOR A REIT

Revenue Growth > 5%

Net Profit Growth > 10%

Distribution Yield > 5.5%

Current Ratio (Current Assets/Current Liabilities) > 1.0 - 1.2

Gearing (Total Borrowings/Total Assets) < 0.35

Occupancy > 80%

Rental Reversion (Conversion to New Rental Rates) > 10%

Price to Book Ratio < 3x


REGAL REIT BENCHMARK AGAINST KPIs

Revenue Growth +13.0% > 5%

Net Profit Growth (with property gain) -4.7% > 10%

Net Profit Growth (without property gain) +16.6% > 10%

Distribution Yield 7.2% > 5.5%

Current Ratio 1.77 > 1.0 – 1.2

Gearing 0.32 < 0.35

Occupancy 92.9% > 80%

Rental Reversion NA > 10%

Price to Book Ratio 0.45x < 3x


BENCHMARK vs SIMILAR REITs


Regal REIT 6Y 1N Japan Hotel REIT 3Y 4N Pebblebrook Trust 4Y 3N Based on the KPI metrics above Regal REIT outperforms the other REITs

KPIs REGAL JAPAN HOTEL PEBBLEBROOK

REIT REIT HOTEL TRUST

Revenue Growth > 5% Yes Yes Yes

Profit Growth > 10% No Yes Yes

Distribution Yield After Tax > 5.5% Yes No No

Current Ratio > 1.10 - 1.20 Yes No No

Gearing Ratio < 0.35 Yes No Yes

Occupancy Rate (Above 80%) Yes Yes Yes

Unit Price vs NAVPU (Undervalued) Yes No No

EXAMPLE OF CAPITARETAIL CHINA H1 2015

• Revenue Growth +9.7% >5%

• Net Profit Growth (with property gain) -30.6% >10%

• Net profit Growth (without property gain) +74.5% >10%

• Distribution Yield 7.8% >5.5%

• Current Ratio 2.22 >1.0 -1.2

• Gearing 0.27 <0.35

• Occupancy 95.0% >80%

• Rent Reversion 7.8% >10%

• Price to Book Ratio 0.84x <3x

Note the Rent Reversion


EXECUTION AND TARGET


• Buying strategies:

When new units are issued

Before announcement of distribution

Upon acquisition of assets

• REITs are ideal for long term holdings in order to realise 50% - 100% gain

For example Axis REIT gained 133.1% over approximately 8 years or 16.6% returns annually

Simon Property Group (US) gained 604.1% from 2009 till present including dividends. This is equivalent of 86.3% in annual returns

REITs’ INCENTIVES vs PHYSICAL PROPERTIES


REITs PROPERTIES

No down payment required May require down payment

No loan required. You invest within your means Require loan to finance the purchase.

High liquidity. Easy to enter and exit your investment. You get paid Long process to complete purchase. Even longer process and

within days duration to exit. Could be many months before you finally get paid

the full amount due to you

Less risky in terms of financial commitment and in the event of More risky in terms of financial commitment in the event of

escalating interest rates escalating interest rates

Allows the average middle income earner to invest in prime real As an average middle income earner, your investment is limited to

estates as a unitholder your level of affordbility and prime real estates could be priced

beyond your reach

REITs’ INCENTIVES vs PHYSICAL PROPERTIES (CONT’D)


REITs PROPERTIES

Properties are managed by professionals. Best rental is assured. You managed your own property, including paying the various bills

You participate as an investor not as a caretaker of the property and making good any defects (caused by the tenant or due to

normal wear and tear)

No severe fall in revenue if a vacancy occurs as long as the You will not earn anything if your property becomes vacant or

overall occupancy remains healthy when the tenant terminates the rental early

Steady income stream is ensured. Income is unencumbered Rental income needs to be set off against the monthly loan

instalment

Capital appreciation at gradual pace when the company increases Capital appreciation subject to market speculation and sentiment

its assets base and earning capacity

A REIT REINVESTMENT SCHEME

DISTRIBUTION AT 7.0% PER ANNUM + 3.0% FD


RM50,000 over 30 year period

Total returns 328.7%

Annual returns 11.0%

If REIT increase in price at 2.5% per annum



A REIT REINVESTMENT SCHEME

DISTRIBUTION AT 7.0% + REINVESTMENT INTO SIMILAR REIT


RM50,000 over 30 year period



If REIT increase in price at 2.5% per annum



BEST REITs


• Singapore and HK listed REITs:

Superior returns due to tax free nature

Superior current and gearing ratio

Less reliance of debt to fund distribution and share buy backs

Paying a distribution within their means and not exceeding the net income

FOR MORE ON REITS OR FOREIGN SHARES


Available at:

ALL POPULAR BOOKSTORES

In Malaysia


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GLIMPSE OF GAINS AS AT 8 JULY, 2016 INVESTFOREIGNSHARE.COM COACHING


BUY NOW

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THANK YOU!

PC WONG


Q & A

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