Lately, I received a list of questions on assessing the financial results of a REIT in Malaysia via email. The email contains an ExcelSheet and is written in Mandarin Chinese. So for the benefit of all, I would translate these questions to English. 

Link: ExcelSheet

The REIT in discussion is Sunway REIT, a listed diversified REIT in Malaysia. It has 18 properties valued at RM 8.74 billion as of 31 December 2021. They include 4 retail malls, 6 hotels, 5 offices, a hospital, an university campus, and as well as a piece of industrial property in Malaysia. 

Here is a disclaimer: 

The focus of this article is on the interpretation of its financial statements and it is not intended to be a recommendation to buy, hold or sell this security. Please take full responsibility for your own investment decisions and perform your due diligence before making any investment.

So in Part 1, let’s focus on the first question: 

Here is my English translation of Question 1: 

Sunway REIT’s earnings per share (EPS), net income, return on equity (ROE) and return on investments (ROI) in 2016-2019 have failed to exceed figures or levels obtained in 2015. This is despite the absence of COVID-19. So, has it plateaued? Of course, the discussion point is not on making predictions but on assessing its business potentials. So, can Sunway REIT improve on its results and do better in the future, outperforming its achievements in 2015? 

Answer to Question 1: 

First, let’s establish the objective for investing in REITs and that is to receive and collect a recurring stream of income distribution (dividends) from them. So, the REITs that could do so are ones that have most of their properties receiving and collecting consistent growth in rental income. 

So, the way to assess a REIT’s financial results would be a little unique. 

For REITs, I don’t consider their net income, EPS, ROE and ROI. This is because a REIT would include ‘changes in fair value (FV) of Investment Properties’ into the income statement (statement of profit or loss). The FV of Investment Properties of a REIT is a non-cash item and does not reflect on its management’s capability to generate consistent growth in rental income from their properties. 

Source: Sunway REIT’s Annual Report 2019 (Page 347)

For example, you can run a business in a shop that you own. In a year, you have incurred $1 million in loss from your business operations. But, in that year, your shop (property) had appreciated in value by $2 million. So, do you consider that year as a profitable year for your business? For me, the answer is no. I’ll make a distinction between: 

1. Management’s Performance: Business Loss of $1 million. 

2. Property Valuation: Appreciated by $2 million. 

To assess management’s performance of a REIT, I look at the following:

1. Gross Revenue 

2. Net Property Income 

3. Distributable Income 

4. Distribution per Unit (DPU) 

Source: Sunway REIT’s Annual Report 2019  (Page 347)

So here is Tip #1: 

Focus on ‘Distributable Income’, not ‘Net Income’. 

Here, if we just focus on Sunway REIT’s distributable income (before COVID-19), we would find that these figures had continuously grown, which is in line with a consistent growth in its group revenue and net property income since 2012. 

They are as follows: 

Source: Sunway REIT’s Annual Reports (2012-2019)

Over here by including ‘FV in Investment Properties’, we can see the fluctuation in Sunway REIT’s net income in 2012-2019. 

Source: Sunway REIT’s Annual Reports (2012-2019)

Clearly, Sunway REIT’s net income in 2015 is the highest in that period for it had recorded the largest appreciation in its property valuation in that year. As for its net income in 2016 and 2019, they are lower due to low property appreciations in both of these years. 

Conclusion (Part 1): 

In response to Question 1, it is vital to note that our primary objective in buying REITs for investment is to collect a consistent stream of income distribution. So, the method to assess the financials of a REIT is different from a typical stock. As discussed, REITs tend to include ‘FV of Investment Properties’ in the Profit or Loss Statement to calculate its net income. This causes fluctuating net income. Thus, as an investor, I choose instead to focus on a REIT’s distributable income. 

In Part 2, I would answer Question 2, where the focus is on its balance sheet. In that article, I’ll discuss the importance of a REIT having a healthy balance sheet, which is a key booster for it towards sustainable growth. So, stay tuned for it. 

Here, if you wish to learn more on the art of stock investing, here’s a free training you can attend:

Link: How to Build a Stock Portfolio that Pays Increasing Dividends?

Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with Co-Founded, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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