The 6 criteria when picking the right REITs.

There are various types of REITs operating in various sectors. REITs are also priced differently by the market due to quality of management or the REITs perceived growth potential and perceived risks, among others. So, how do you select a good one. I would like to list down my 6 criterias here.

Criteria #1: REIT Price Undervalued (current price < NAV)  
Always buy a REIT only if its current price is below its Net Asset Value (NAV)Net Asset Value (NAV). NAV = Total Assets – Total Liabilities.

Criteria #2: High Dividend Yield (> 6%)
Dividend Yield = Annual DPU/ Current Price x 100%.
The main reason for buying REITs is for their high dividend payouts. So, the first screen is to select REITs with the highest dividend yields. Dividend Yield should be more than 6%.

Criteria #3:  Low Gearing Ratio (< 30%)
Gearing Ratio tells you how much money the REIT has borrowed, relative to the value of the property. The higher the debt (gearing ratio), the more risky the investment is. So, check the Gearing Ratio of the REIT. and ensure the Gearing ratio < 30% before investing.

Criteria #4: High Interest Coverage Ratio (> 5)
The NPI divided by interest expense is the interest coverage ratio. Banks and rating agencies consider anything above 5x to be safe.

Criteria #5: High NPI Yield (NPI / Revenue > 95%)
Net property income (NPI) is similar to gross profits of a company. This is the amount of profit it makes from its rental operations after deducting property expenses like maintenance expenses, property tax and insurance expenses. NPI divided by the revenue gives the NPI yield. This ratio can be compared across different REITs as a measure of operating efficiency.

Criteria #6: History of Consistent Growth in Free Cash Flow & DPU
Select REITs that have a track record of achieving consistent growth in Free Cash Flow and DPU for the last 5-10 years.