Ask a Fund Manager – on REIT Investment by Dato’ Stewart LaBrooy - ChingFoo Lieu

Any drop in stock price will send jitters down investors’ spine – no matter you are a savvy or a layman investor.  Most M-REIT counters, known for its high yielding traits and relatively non-volatile price, suffered double digit drop in prices in Aug 2013 as the general market dips. Anyone with emotion will be shaken to a certain extent, but it is when in these times of adversity, an investor’s mettle and faith are tested. We don’t want to only talk about the good times when things are fine and dandy, where everyone can break out a few bottles of champagne to celebrate.

So, do you sell to cut loss? Or do you sell to realize the profit and end up losing an income generating asset for short term? It is during these turbulent times, emotions overruled logic for most people, but the reverse is really what is needed. And with all the noises from various media, what is the logic one should stick to? One word – the fundamentals – seeing it from a fund manager perspective. In this short interview with Dato Stewart LaBrooy, some of his answers might be able to lead you in making better informed decisions if you are holding on REITs.
Lieu Ching Foo: “M-REIT’s are losing their lustre as investors switch to MGS, of which its yield has risen.” Headlines in many analyst reports.  While it makes perfect sense for institutional investors to do so, it also means opportunity for retail investors to accumulate REITs into their portfolio. REIT prices drop, yield “rises” again. Normal retail investors can’t really buy bonds directly anyway. Your comments and opinion for retail investors?
Dato Stewart LaBrooy:  REITs are equities that behave like a bond. However the one thing that differentiates a REIT from a Bond is that a REIT is asset backed and a Bond isn’t. A RM 1 investment in a 10 year MGS (which still gives a lower yield than a REIT) will return RM 1 to the Bond holder after 10 years. And after 10 years the value of that RM 1 will be much lower – eroded largely by inflation. However the value of the property is still intact and its value will have grown as it keeps pace with inflation.
In addition a diligent REIT Manager will have, over the 10 year period, grown the fund and its dividend yield thereby raising its share price.
 REITs are the perfect natural hedge against inflation.
In my opinion  It is a good time for investors to look at reentering the market to accumulate positions in REIT stocks.

A prominent speaker on Conventional and Islamic REITs in the region, Stewart LaBrooy is the CEO of the first REIT to be listed on the Mainboard of Bursa Malaysia in 2005; Axis REIT Managers Berhad.

 Stewart holds a Bachelor of Engineering (Hons) degree and a Post Graduate Diploma in Business Studies from the University of Sheffield. He is a Board member of the Asia Pacific Real Estate Association (“APREA”) and the Chairman of the Malaysian REIT Managers Association (“MRMA”).

Lieu Ching Foo: From a REIT Managers standpoint, how important is the Net Property/Rental Income compared to the Net Trust Income? (The reason I asked this is because a news recently stating Sunway REIT net profit drops due to recent capex, causing its properties fair value gain to drop but its NPI actually increases compared to the same quarter in the previous fiscal year).
Dato Stewart LaBrooy: Net Trust Income incorporates changes in the fair value in properties of the REIT.
This can distort the actual understanding of the performance of the REIT.
A sudden gain in Fair value of the assets of a REIT can send the Net Trust Income much higher in that quarter leading to think that there are bumper profits.
These gains are Undistributed gains that are balance sheet items and are realized only when an asset is sold.
What investor should look at the Net property (rental)  Income as it is a reflection of the performance of the portfolio.
 The second item that investors should look at is the expenditure of the REIT – is it rising year on year ? It shows that the Manager is having difficulty maintaining the efficiency of the expenditure of the portfolio.
 Capex cost for REIT is being capitalized in the balance sheet and not expense off in the income statement .  Therefore does not impact the NPI.

Lieu Ching Foo: Axis- REIT is the epitome of an excellent growth story since its inception. What are the measures Axis- REIT takes to keep its property expenses in check as it acquires more assets? Obviously if the revenue (new income from new properties or rental reversion) are not coming in as fast as the rise in property expenses, your NPI will be affected. Axis -REIT does this effortlessly. Is there any secrets to this or it is because of the nature of industrial REIT itself compared to say, office or retail REITs?
Dato Stewart LaBrooy:
Our growth drivers are as follows:

• Organic Growth – Through the optimization of the assets in the portfolio.  Much of this is through our Asset Enhancement Initiatives where we refresh our buildings and increase usable space.
• Growth through accretive acquisitions
• Careful capital management to ensure the cost of debt is kept as low as possible.
• Expenses monitoring  at all levels of the operation
• Tenant Care Program to ensure our tenants interests are well looked after.
• Using technology to boost productivity
• Developing human capital
• Managing all aspects of the business in- house

These principles can apply to any asset class. Having an excellent team of professionals running the business is paramount to our success.
Lieu Ching Foo: In your article in The Edge in May 2013, – “Allowing REITS to take on construction risk” – how is the regulators taking the proposal to allow for 10% cap for greenfield projects?
Dato Stewart LaBrooy: We have discussed this internally within the Malaysian REIT Managers Association and will be engaging the regulators later this year on this issue.