REITs have been experiencing a recovery of sorts since last year.
Retail REITs that own local malls are now enjoying higher tenant sales and footfall compared to the lows.
Industrial and commercial REITs are also enjoying some respite after doling out tenant relief measures to prop up beleaguered tenants.
That said, share prices of REITs such as Frasers Centrepoint Trust (SGX: J69U), or FCT, and CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, have been languishing for 2021.
Despite the purported recovery, CICT’s unit price is still down around 3% year to date, while FCT’s unit price is around the same level it was at the start of 2021.
Last year’s top performer, Keppel DC REIT (SGX: AJBU), has seen its unit price decline by nearly 10% year to date.
Should investors have the confidence that conditions will improve further?
And can REITs see their share prices rising in tandem with these improvements?
Still a great vehicle for dividends
At this point, it’s useful to remember that REITs are mandated by law to pay out at least 90% of their earnings as dividends.
Such a rule is in place to ensure that REITs enjoy favourable tax treatment.
As such, REITs remain an attractive option for income-seeking investors who are looking for stable and consistent dividends.
Also, the value of a REIT is backed by physical assets (i.e. real estate), which ensures that its value holds up well during a crisis.
This resilience also allows unitholders to sleep peacefully at night, knowing that their REIT investments remain safe.
Yields remain attractive
REITs may be going through a continued tough patch, but their dividend yields remain attractive.
It’s important to note that most REITs have already doled out the bulk of their tenant relief measures last year.
New measures such as the recent return to Phase 2 will have some impact, but not as severe as last year’s circuit breaker.
Hence, the REIT’s most recent distribution per unit (DPU) can be taken as a good indication of a sustainable yield.
FCT’s forward yield stands at 4.9% while CICT’s yield stands at 4.1%, both above the long-term inflation rate of 2% to 3%.
Keppel DC REIT also sports a dividend yield of close to 4% along with a bright outlook for its data centre portfolio.
Moving forward, any uptick in the economy may translate into higher DPU for these REITs.
REITs have also not been standing still.
Taking advantage of attractive asset values amid abundant opportunities, many have undertaken yield-accretive acquisitions to boost their DPU.
Mapletree Industrial Trust (SGX: ME8U), or MIT, recently announced a major acquisition of 29 data centres across 18 states in the US.
This transaction allows data centres to form more than half of the REIT’s assets under management (AUM). A bonus is the 3.3% uplift in DPU that unitholders will enjoy.
Ascendas REIT (SGX: A17U) has also gone big on data centres with the acquisition of 11 European data centres back in March.
Apart from these two REITs, other REITs have also been busy snapping up properties around the world to increase their AUM and DPU.
The spate of acquisitions since late last year showcase REITs’ ability to continue borrowing amid tough conditions, and is a good indicator of their financial strength.
Unitholders also stand to gain from these transactions as the REIT enlarges its asset base and pays out more by way of dividends.
Get Smart: If the business improves, the share price will follow
Warren Buffett, arguably one of the best investors of our time, has a simple observation.
He believes that we should, as investors, focus our time on analysing the business and let the share price take care of itself.
Because when the business improves, the share price should naturally follow suit.
If we apply the same logic to REITs, a consistent increase in AUM and DPU should eventually translate into a higher unit price.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.