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Dividend Investors Alert: Is the REIT Model Permanently Broken?

Royston Yang
Dividend Investors Alert: Is the REIT Model Permanently Broken?

REIT investors have had it good for many years.

Since the very first REIT listed in Singapore in 2002, REITs as an asset class have grown significantly.

For income-seeking investors, REITs are like the perfect dividend instrument — stable, consistent and predictable.

However, the COVID-19 pandemic has thrown a harsh spotlight on REITs.

Governments around the world have raced against time to lock down their countries and shut borders.

The measures have resulted in the closure of malls, disruption of supply chains (impacting industrial corporations), the plunge in hotel room occupancy rates and the hollowing out of commercial space (due to more staff working from home).

In short, the changes have been both swift and unsettling.

For unitholders who are suffering from lower distribution per unit (DPU), they may ask themselves — is the REIT model broken?

A trend of plunging DPU

With people movement all but curtailed, retail malls in Singapore were the first to announce deep cuts to DPU.

SPH REIT (SGX: SK6U) started this trend by reducing its DPU by 80%.

Frasers Centrepoint Trust (SGX: J69U) followed suit with a 48.7% reduction in its latest quarter’s DPU, while Mapletree Commercial Trust (SGX: N2IU) slashed its DPU by 60.6%.

These drastic steps were taken to retain cash for doling out to tenants in support packages as mandated by the government to help keep businesses afloat.

Hospitality REITs have not had it much better, either.

These properties are directly in the path of the virus’ onslaught, resulting in plunging gross revenue and net property income.

Far East Hospitality Trust (SGX: Q5T) reported a 27.3% year on year fall in distributable income, while CDL Hospitality Trust (SGX: J85) reported a 42.1% year on year decline in net property income.

Shifting habits and norms

The carnage has been widespread and broad-based, with nary a REIT being spared.

However, investors need to sit back and think about the underlying causes behind these declines.

With air travel close to drying up completely, people are prevented from travelling, thus impacting hotel occupancy rates.

Movement control orders and lockdowns have shut down malls in many countries, causing financial stress to tenants.

As more people work from home, less office space is required by large corporations, putting pressure on rental and occupancy rates for commercial REITs.

In short, the pandemic has led to shifting habits and changes.

Some of these may be temporary. People will start to flock to malls once the circuit breaker measures are lifted, while travellers may begin to patronise hotels again once borders are reopened.

But some changes could very well be permanent and long-lasting.

These structural shifts could impact REITs over the long-term and lead to permanently lower DPU.

An altered post-pandemic landscape

Investors, therefore, need to assess each REIT to determine if its business model can hold up in a post-pandemic world.

For instance, retail REITs with quality assets located in choice locations would witness a recovery in footfall once circuit breaker measures are lifted.

Hospitality REITs may also enjoy some measure of relief once the pandemic is contained and air travel is restarted.

For REITs with overseas assets, such as Lippo Mapletree Indonesia Retail Trust (SGX: D5IU) and ARA US Hospitality Trust (SGX: XZL), they continue to be impacted by COVID-19 measures, resulting in a low level of clarity on their future.

The key here is to ensure you are vested over the long-term in REITs whose business models do not suffer from structural shifts in a post-pandemic landscape.

Get Smart: Select your REITs carefully

Let’s face it — it has not been an easy journey for REIT investors.

The pandemic has thrown up more questions than answers about whether it will be back to business as usual for REITs even after the pandemic subsides.

However, I believe the REIT model is not broken. Investors simply need to be more discerning when it comes to selecting REITs as COVID-19 has exposed vulnerabilities that were not noted before.

Take Keppel DC REIT (SGX: AJBU) for instance. The niche data centre REIT continues to enjoy healthy occupancy as demand for data soars.

For its first quarter 2020 business update, the REIT reported a jump of 32% year on year in distributable income, while DPU increased by 8.6% year on year.

Well-managed REITs with quality assets that are highly sought after will continue to deliver consistent DPU to unitholders over the long-term.

The REIT model is, therefore, still intact.

But investors need to remain cautious and vigilant as the pandemic is still evolving.

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Disclaimer: Royston Yang owns shares in Keppel DC REIT.

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