REIT Rating

  • Concept
  • Rating Methodology
  • Process
  • Rating Scale

CARE’s Rating of REIT fund is an opinion on the REIT’s investment quality, based on the fundamental assessment of the REIT. CARE-REIT rating will be assigned on a five-point scale from 1 to 5, with ‘CARE:REIT-1’ indicating highest investment quality and ‘CARE:REIT-5’ indicating poor investment quality.

CARE REIT Rating does not comment on the kind of returns that can be earned by investing in the REIT units. It is also not a recommendation to invest or not in a particular REIT.


Benefits of REIT Rating

REITs have been introduced in India for the first time and also they have several unique features. A slew of real estate players have shown interest in introducing REITs and listing these in the exchanges. CARE-REIT rating would serve as a valuable tool for investors for choosing among REITs in terms of fundamentals and issuers for better showcasing the investment quality of the REITs.

The REIT rating would encompass the three key factors


  1. Business Risk
  2. Size of assets under management is assessed as larger REITs will have greater financial flexibility to sell non-core properties and focus resources on better-performing properties. The type of property (office space, malls, hotels etc.) in which the REIT has invested is assessed as different types of properties have different risk levels. Another important focus is the REIT’s competitive position, which is indicated by whether the REIT is the ‘landlord of choice’ in its core markets. Business risk is being analysed in two dimensions – ‘prospects of higher returns’ and ‘safety of returns’.

    Factors determining prospects of higher returns would be determined by

    Factors determining safety of returns would be determined by


  3. Financial Risk
  4. Financial risk analysis includes examination of the following factors:

    1. Liquidity & Financial Flexibility:
    2. Liquidity is an important factor for capital intensive businesses like REITs. The firm’s cash flow position and working capital lines are assessed to ascertain the adequacy of liquidity to meet short-term obligations, expenditure for maintenance of properties and dividend payments. REITs with a proven record of raising funds from the capital market (both equity and debt) are viewed more favorably than those that have not accessed the capital market.

    3. Operating Margins and earnings
    4. A REIT’s ability to generate high, consistent returns with revenue growth is analysed. These are reflected in the operating margins, efficiency, volatility of returns and earnings growth rate. Interest coverage ratio (including capitalized interest) is also considered.


  5. Management/Sponsor Evaluation
  6. The management team’s ability in decision making, ability to execute their vision and strategic plans and the management’s risk appetite are important components in CARE’s criteria for Rating of REITs. CARE attempts to critically analyse how the management team is geared up to handle the various risks inherent in operating a REIT. Moreover, CARE takes cognizance of the level of support provided by the sponsor to the REIT.

Process


Rating Symbol Definition
CARE:REIT-1 REIT funds rated in REIT-1 category are judged to be of highest investment quality; likelihood of consistent returns over the foreseeable period is excellent
CARE:REIT-2 REIT funds rated in REIT-2 category are judged to be of high investment quality; likelihood of consistent returns over the foreseeable period is high
CARE:REIT-3 REIT funds rated in REIT-3 category are judged to be of good investment quality; likelihood of consistent returns over the foreseeable period is good
CARE:REIT-4 REIT funds rated in REIT-4 category are judged to be of average investment quality; likelihood of consistent returns over the foreseeable period is moderate
CARE:REIT-5 REIT funds rated in REIT-5 category are judged to be of poor investment quality; likelihood of consistent returns over the foreseeable period is low

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