Friday, September 7, 2018

Sustainable Competitive Advantage Between REITs

The Impregnable Mapletree Fortress!

The ‘moat’ of a REIT can be categorized into quantitative and qualitative factors. Most investors would be familiar with the quantitative factors. Below is a checklist of metrics which I collate in an excel sheet whenever my vested REITs report their quarterly results. You can choose to track the 5-year or 10-year performance track record of these metrics if you wish to. These are the quantitative stuff I look out for.

  •  Growing DPU
  •  Growing NAV
  •  Stable gearing ratio below 38%
  •  Stable or long WALE (Less than 25% of NLA expiring in a single year)
  •  Well-staggered debt expiry profile
  •  High interest coverage
  •  High percentage of fixed-rate debt
  •  Stable & high occupancy rate above 90%
  •  Positive rental reversions
  •  High tenant retention rate
  •  Healthy land lease tenure profile (preferably freehold or long lease-hold)

All these information could be found in the REITs’ annual reports. Pretty straightforward actually. Just download the PDF file from their websites and punch the figures into an excel sheet. The qualitative factors, however, are trickier to decipher.

Scale – Big Is Beautiful
A mega-scale REIT operates more efficiently over the long-term. CapitaLand Mall Trust (CMT) owns such a massive portfolio of shopping malls that it could afford to redevelop Funan mall over 2 years without significant impact on its DPU. Frasers Centrepoint Trust (FCT) managed to carry out major AEI at NorthPoint mall while maintaining its DPU growth last year. This is impossible for a small REIT such as SPH REIT which owns only 2 malls.  Other mega-sized REITs like Ascendas REIT (AREIT), Mapletree Logistics Trust (MLT) & Mapletree Industrial Trust (MIT) enjoy this competitive advantage too.

Secondly, these giant REITs could recycle capital efficiently by divesting old, low-yielding properties with limited redevelopment potential and acquiring new, higher-yielding properties in order to grow DPU. This is illustrated by CMT’s recent divestment of Sembawang Shopping Centre. The sale proceeds would be used to partially fund the acquisition of a 70% stake in WestGate Mall.

Sponsors – Leveraging On Institutional Resources
Recently, a couple of REITs with strong, institutional sponsors have announced overseas expansion mandate. This development is most obvious among the Mapletree stable of REITs. They mean business and no time was wasted. MIT expanded into the US data centre market in a joint venture with Mapletree Investments. Mapletree North Asia Commercial Trust (MNACT) expanded into the Japanese office market. MLT acquired a 50% stake in its sponsor’s 11 China logistics properties, aiming to ride on the ‘One Belt, One Road’ initiative. 

All these expansion was made possible/easier due to the sponsors’ ready pipeline of ROFR assets, financial support, existing management platforms and deep knowledge of those overseas markets.  Scale and presence of sponsors in overseas markets are key ingredients for expansion success of local REITs. Institutions like Mapletree Investments and Ascendas-SingBridge are major units of Temasek Holdings, one of the top sovereign wealth funds in the world. They have achieved a sophisticated level of institutional framework. They are committed. They are here to stay and prosper over the long-term with well-established investment processes and systems. They are not just some ‘fly-by-night’ asset managers out for a quick buck. For example, AREIT’s freshly-acquired UK logistics portfolio would be managed by the talents at Ascendas Funds Management. Similarly, the management team of MNACT’s Japanese office properties have been running the operations in Japan for years. This would make MNACT’s expansion into the Japanese market operationally smoother. The REIT does not need to struggle in a foreign market, starting from scratch.

Another potential competitive advantage Mapletree Investments has over other sponsors is its deep bench of real estate managing talents. Warren Buffett essentially leaves the day-to-day running of his vast business empire in the hands of highly capable managers/executives whom he trust. Mapletree found a way to ensure continuity in its real estate management teams by cultivating strong partnership ties with Singapore Management University (SMU).  Since 2013, Mapletree has awarded 20 Mapletree Bursaries to 15 underprivileged students to motivate them to achieve educational excellence by providing them with financial support.  To date, 11 of the recipients have graduated, and four are still pursuing their undergraduate studies at SMU. A multi-faceted Mapletree Real Estate Programme was launched in Jan 2018. This programme aims to equip students with the necessary knowledge and cross-disciplinary skills to navigate the growing real estate sector in Singapore and globally.

In conclusion, I would urge unit-holders not to become too obsessed with only the quantitative factors. Spend some effort, dig deeper, read more and you would realise that the qualitative factors could be the ‘secret sauce’ to a well-managed REIT. 

If you want to shine like a diamond, you need to be cut like a diamond


garudadri said...

Nice post! I agree with the fact that well managed big REITs are the way to go! Let us see how ESR does in future. I plan to take small bites st preset target prices for Ascendas Reit, MCT, MIT, MLT etc- to build up a corpus for passive income. Waiting for a correction this month end!

Cory said...

A number of them rarely tap on retailers for fund. Some prefer they do. I don't and I prefer this way.

Dividend Tech Warrior said...

Hi garudadri,
Thanks for the compliment.
I also feel Warburg Pincus and ARA surely have grand plans to grow ESR.

Dividend Tech Warrior said...

Hi Cory,
I am usually alright with equity fund raising from reits if they use it efficiently for DPU-accretive acquisitions. I guess some reits stick to whatever works best for them. FCT has done pretty well in terms of DPU & NAV growth just with private placements.

Unknown said...

A good analysis writeup on Mapletree Industry Reit...I only focus on Ascendas India Trust and First Reit for the time being.

Value Investing Singapore