Lease Profile of REITs

Previously, I've shared on what to look out for when assessing debt profile of REITs, this time let's us look at lease profile of REITs. Unlike debt, leasing information presented by REITs is not standardized across the board. Some REITs would provide information based on NLA (Net Lettable Area), while some based on GRI (Gross Rental Income). This make apple to apple comparison challenging.

1) Occupancy
Where to Get: Presentation Slide

Occupancy is calculated based on NLA. This value is not applicable to hospitality REITs. Some REITs properties are leased under master lease scheme, in which a lessee rents the whole property. This is very common for industrial, logistics and healthcare REITs. In the case when this master lessee vacates, occupancy would dropped significantly. Finding a replacement tenant would be difficult and transition from master lease to multi-tenanted require time. The same apply to anchor tenants for retail and office REITs.

2) REVPAU/REVPAR - Revenue per Available Unit/Room
Where to Get: Presentation Slide

For hospitality REITs, we use REVPAU instead of occupancy. REVPAU can be calculated in the following ways:
i) Average Daily Room Rate (ADR) x Occupancy Rate
ii) Total Revenue from Room / Available Room

There are 2 types of leases which are master lease and management contract. REITs do not provide REVPAU information for master lease if master lessee pays a fix rent without variable component. Do note that some hospitality REITs classify some of their properties under property, plant and equipment instead of investment properties in their balance sheet. Refer below examples:

3) WALE - Weighted Average Lease Expiry
Where to Get: Presentation Slide or Annual Report for Hospitality REITs

This refer to the weighted average time that all leases are due, which could be calculated based on NLA or GRI. Some REITs provide WALE by only NLA or only GRI while some provide both. Whenever possible, I would prefer to take "by GRI" value as it reflect expiry on income. Big NLA doesn't mean high GRI. Generally, WALE is shorter for Retail REITs and longer for hospitality and healthcare REITs.

4) Highest % of Lease Expiry in Same Year
Where to Get: Presentation Slide

Again, this could be calculated based on NLA or GRI. It is preferred that leases expiry are spread as evenly as possible. Look out for REITs that have have high % of lease expiry in particular year, there is risk that tenants would not renew those lease, especially during economy downturn.

5) % of Hedged/Derived Currency in SGD
Where to Get: Presentation Slide or Annual Report or Calculate from Financial Statement

This is not to be confused with natural hedging where borrowing in same currency as underlying assets. This value is to check the % of income received in SGD and % of foreign currency income hedged. This value is taken as 0% for REITs that traded and pay dividend in foreign currency, like Fortune REIT in HKD and Manulife REIT in USD.

For REITs that have only Singapore properties, they would not face any foreign exchange risk. But for REITs with oversea properties, this value is something to be taken note of. The higher the value, the better currency stability for the REITs income. However, hedging can only provide stability for short term foreign exchange fluctuation, it could not provide protection for long term currency depreciation.

6) Weighted Average Land Lease Expiry
Where to Get: Presentation Slide or Calculate from Annual Report

This is not related to tenant leasing tenure, but about REITs properties land leasing tenure. This information is easily available for industrial and logistics sector in quarter presentation slide or annual report. For other sectors, you would have to calculate yourself.

Some rules that I using for calculation:
i) Include freehold properties as 99 years in calculation
ii) For properties with land tenure more than 99 years, take as 99 years in calculation
iii) Land tenure with renewal option - take as REITs would renew it with maximum tenure
iv) Calculation weightage based on GRI if information available; else take NPI. Calculation weightage by NLA or property valuation is least preferred.

Some examples:

Take land lease expiry as 99 years instead of 841 minus year 1985

 Take as it would renew to maximum tenure

Add freehold properties into your calculation

Here is the end for this post, I have not include tenant profile in this section as I find that tenant profile is more relevant to diversification section which I would write about later on. If you have other things in mind, feel free to share.