How does S-REIT earn and spend its money

Info 0004_How does REIT earn and spend its money

Hope everyone has a very huat Chinese New Year with lots of ang bao money! It’s time to learn more about how S-REITs work so that we can use our ang bao money to generate more money for our bak kwa and pineapple tarts fund in the coming years.

In this post, let’s learn about how S-REITs earn and spend their moolah!

For a starter, let’s establish that a company always seeks to maximize its revenue and minimize its expenses. A simple example would be during Chinese New Year, for it to be very huat, you and I would like to get more ang bao money (i.e. REVENUE) from our parents, our relatives (though this money comes with incessant naggings and is very painful to earn), our friends’ parents, our friends’ friends’ parents, etc… However, for all this visiting to make sense financially, we need to minimize the ang baos we give to grab, uber and hardworking taxi uncles (i.e. EXPENSE) as we rush from visitation after visitation.

On the same note, to look for bao jiak S-REITs, we need to understand how S-REITs earn and spend their money and look for S-REITs that can keep getting higher revenue and lower its expenses.

(Bao jiak S-REITs: Real Estate Investment Trust that is highly certain in maintaining its dividend payout i.e. moolah for bak kwa and pineapple tarts fund)

REVENUE

Quick Recap: https://reitit.org/2018/02/10/how-does-s-reit-work/

S-REIT owns properties that are then leased to tenants who pays rental (i.e. Rental Revenue).

In order to maximize Rental Revenue, S-REIT should maximize:

  1. Occupancy 
  2. Rental (S$ per square foot)  

Do take note of these 2 factors (we call them revenue drivers) as REIT-it will discuss more on these 2 concepts in subsequent posts.

EXPENSE

In every business that earns money, there will be expenses. From the chart above, we can see that the main expenses of an S-REIT boils down to 3 items:

  1. Operating Expenses (c. 22-29%)
  2. Interest Expenses (c.14-19%) 
  3. Manager/Trustee Fees (c.6-8%) 

Out of the above 3 items, operating expenses and manager/trustee fees are the factors that we should always take note of and compare among S-REITs in the same sector to make sure the S-REITs are efficient and not overcharging the fees. Operating expenses is usually a function of size as larger REITs may often find themselves having lower operating expenses due to economies of scale (i.e. spreading costs over more properties)

S-REIT actually borrows a lot of money (up to 45% of total assets by regulation) to buy the properties and hence interest expense is a large part of S-REITs’ expenses. Some S-REITs do not have fixed interest rates and will have to pay more interest expense when interest rates go up. S-REITs can only pay us dividends after paying off these interest expenses to the banks. As such, interest expense becomes a key threat to S-REITs paying us our bak kwa and pineapple tarts moolah. 

Some of us may know that interest rates have been rising since 2017. So how does this affect our bak kwa and pineapple tarts fund? Which S-REITs would be better buys in consideration of rising interest rates?

Stay tuned as REIT-it unravel this mystery for you in our next post.

Disclaimer: Investment in S-REITs, as with other investments, carries the risk of losing value. Reader should exercise personal discretion when making any investment in S-REITs.

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