Unless you’ve been living under a rock, you’ve probably heard bad news about the REIT sector.
Yes, I am talking about the combination of high inflation and surging interest rates that have dented sentiment for this asset class.
Investors are now saying all sorts of negative things about REITs, and many of them are reportedly throwing in the towel on the sector.
But herein lies the problem.
These investors are focusing too much on the REITs’ share prices and neglecting the true purpose of REITs.
And that is to give you a dependable source of passive income.
REITs deserve a place in your portfolio
My colleague and co-founder, David Kuo, believes that REITs are still the perfect asset class for regular dividends.
He is a true-blue income investor, meaning he does not buy a stock unless it pays out a dividend.
It may sound like a simple rule, but it helps to effectively filter out the universe of stocks and focuses your attention on those that provide regular, stable income.
Although REITs may suffer from higher rates and poor macroeconomic conditions, they will still continue to churn out their distributions.
And that’s exactly what David likes about them.
Solid REITs backed by strong sponsors
Even in this tough environment, some REITs are doing well in holding the fort and delivering value to their unitholders.
Take Keppel DC REIT (SGX: AJBU) for instance.
The data centre REIT reported a commendable set of earnings for 2024 with gross revenue rising 10.3% year on year to S$310.3 million.
The REIT reported a strong positive rental reversion of ~39% across its portfolio, demonstrating strong demand for its assets.
Distribution per unit, or DPU, inched up 0.7% year on year to S$0.09451 despite a 6.2% year-on-year rise in finance costs.
CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, also pulled off an admirable performance.
Gross revenue for 2024 inched up 1.7% year on year to S$1.59 billion while net property income, or NPI, increased by 3.4% year on year to S$1.15 billion.
The retail and commercial REIT posted a higher DPU of S$0.1088, up 1.2% year on year.
Then there’s Mapletree Industrial Trust (SGX: ME8U), or MIT.
The industrial REIT posted a higher DPU of S$0.0341 for its third quarter of fiscal 2025, up 1.5% year on year.
These REITs have something in common – they are all backed by strong sponsors that provide financial support during tough times along with a ready pipeline of assets that can be injected into the REIT.
Keppel DC REIT has asset manager Keppel Ltd (SGX: BN4) as a sponsor while CICT and MIT have CapitaLand Investment Limited (SGX: 9CI) and Mapletree Investments Pte Ltd as a sponsor, respectively.
Good times, bad times
The key thing to remember is that REITs, like normal businesses, also go through good and bad times.
Therefore, it’s reasonable to expect distributions to rise and fall with the economy.
When times are tough, the REIT may pay out a little less distribution.
But when the economy comes roaring back, a strong REIT can make back the shortfall and more as it continues to grow its assets.
Remember that strong portfolios will ensure consistently high demand, thereby allowing the REIT to enjoy organic rental growth over time.
Get Smart: An integral part of your portfolio
So, don’t hesitate.
David has been buying REITs and other dividend-paying stocks consistently for years.
By doing so, he has built up an enviable flow of dividends that continues to increase year in, and year out.
There will inevitably be tough times but if you purchase the right REITs, you can enjoy consistent long-term growth in your passive income.
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Disclosure: Royston Yang owns shares of Keppel DC REIT and Mapletree Industrial Trust.
