The current bear market, caused by the insidious Covid-19 virus, has thrown up many attractive investment opportunities for investors.
REITs, in particular, suffered a massive sell-down last week. Share prices are down across from anywhere between 20% and 40%.
At the same time, distribution yields have become more attractive.
Investors need to be wary, though.
A high yield may not always be a great deal, as it may mask underlying issues with the REIT.
Sometimes, the market is simply factoring in a potential drastic cut in distributions arising from stress relating to the REIT’s tenants and flow of rental income.
We look at three REITs with dividend yields above 8%, but investors need to decide for themselves if these REITs may represent the bargains that they look like.
ARA US Hospitality Trust (SGX: XZL)
ARA US Hospitality Trust is a hotel REIT that invests in income-producing real estate assets used for hospitality purposes in the USA. The REIT has a portfolio of 38 upscale Hyatt-branded select-service hotels across 21 states.
The REIT’s share price has plunged by 63% year-to-date, and based on the REIT’s fiscal year 2019 (FY 2019) distribution per unit (DPU) of US$0.0421, it now sports a trailing 12-month dividend yield of 13.2%.
Covid-19 has begun spreading like wildfire in the US, and as at the time of writing, around 66,000 people have been infected there, with almost 1,000 deaths.
There have been urgent calls to close more than just schools, bars and movie theatres in America. In a nutshell, far more needs to be done to tackle the spread of the virus. This may inevitably lead to a draconian lockdown.
The REIT released an update yesterday on the situation. Its portfolio is facing increased booking cancellations and lesser new reservations.
The sharp drop in demand has led to significant declines in room occupancies since mid-March 2020, and this trend is expected to continue in the coming weeks or months.
In light of the above, there is a high chance that the REIT will slash distributions as rental income plunges.
Mapletree North Asia Commercial Trust (SGX: RW0U)
Mapletree North Asia Commercial Trust, or MNACT, is a REIT that invests in commercial properties located in China, Hong Kong and Japan. Its portfolio consists of nine properties with two in China, one in Hong Kong and five in Japan.
MNACT’s share price has tumbled 33% to S$0.78, and based on the annualised nine-month fiscal year 2020 (9M FY 2020) DPU of S$0.05558, the REIT’s trailing 12-month dividend yield stands at 9.5%.
Though MNACT’s portfolio consists of nine properties, one of the properties, Festival Walk in Hong Kong, contributes the bulk of gross revenue and net property income.
For 9M FY 2020, Festival Walk contributed 57.4% of total gross revenue and 56.3% of net property income.
Due to the social unrest that broke out in Hong Kong in June last year, Festival Walk sustained extensive damage and was closed since 13 November 2019.
Repair works were carried out and the REIT is currently assessing the amount of insurance claim for loss of revenue and property damage. The mall has since re-opened on 16 January 2020.
The Covid-19 situation in China seems to be stabilising, with no new domestic cases reported. China has also lifted tough travel restrictions for Hubei on 25 March.
For Hong Kong, the virus situation seems to be under control, though authorities recommend being watchful for new outbreaks.
In Japan, there were around 1,055 cases of domestically transmitted Covid-19 cases, which is well below the numbers seen in badly-affected countries such as Italy, Spain and the US.
Manulife US REIT (SGX: BTOU)
Manulife US REIT is a pure-play office REIT that owns a portfolio of nine prime, freehold and trophy or class A quality office properties in the US.
The share price of the REIT has plummeted 34% year-to-date to US$0.66, and the REIT is trading at a trailing 12-month distribution yield of 9% based on a DPU of US$0.0596 for the fiscal year 2019.
In a Business Times article published yesterday, the REIT blamed the falling share price on fund sell-offs and private bank margin calls.
Management also assured that its leases are secure (with no break clauses) and that the REIT is nowhere near breaking any financial covenants, either.
Robert Wong, the CFO for the REIT, also added that the REIT’s key relationships with its bankers remain strong.
However, Jill Smith, CEO for Manulife US REIT, did confess to being worried about how long it would take for the Covid-19 situation to die down and for things to normalise.
Leasing prospects are expected to slow down in the short-term as tenants adopt a “wait-and-see” attitude until more clarity emerges.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.