Riding on REITs
Major REITs show dividend trend are generally healthier this year
BURSA Malaysia introduced the all-share Real Estate Investment Trust (REIT) Index on Oct 26 last year and to its credit, the REITs Index is definitely a right step forward.
The index is able to capture a unique market segment that is representative of companies in the REITs market, irrespective if the Index constituents are of Retail, Office, Hotel, or Industrial based REITs or for some REITs, Diversified REITs.
Year-to-date, the REITs Index, taking into consideration its normalised level on Jan 2 at 984 points, is down 3.6% to 948 points. Interestingly, the REITs Index itself had dropped to as low as 854 points, or down about 13.2% before bouncing back to its current level. Since its low on March 21 this year, the Index has rallied by 11%.
In October last year, at the launch of the index, Datuk Jeffrey Ng, chairman of the Malaysian REIT Managers Association, estimated challenging times ahead for local REITs mainly due to the current oversupply in the overall property market, which is impacting both revenue as well as dividends paid by Malaysian REITs.
He further commented that most REITs will experience modest to flat growth in the near term. Judging by the performance of the REITs Index, he was definitely spot on as the index is down year-to-date, despite having recouped much of its losses since its bottom in March this year.
The REITs Index has also under-performed the KLCI, which is now up 0.1% year-to-date as of Thursday.
However, what is interesting is not the performance of the REITs in capital value but rather its dividend pay-outs year-to-date, especially now that we have just closed the second quarter (Q2) or first half (1H) reporting season. An an index, the REITs Index do no adjust for dividends that has been paid and hence it is not a total return index.
Dividends paid based on a per share basis is a good comparison to make comparison among REITs as most REITs pay out at least 90% to 100% of their distributable income and hence a good gauge in terms of growth as well as whether they are able to sustain their performance in a challenging market environment.
The dividend trend among the major REITs suggests that dividends are generally healthier this year than they were a year ago with largest increase in pay-out posted by Pavilion REIT, with 1H dividend at 4.34 sen against 3.96 sen a year ago, up almost 10%.
Within the retail segment, IGB REIT and KLCC REIT too improved their y-o-y performance with payouts rising by 5.5% and 1.2% respectively. However, we did see some disappointment especially in Sunway REIT, which is actually more of a diversified REIT, with dividend pay-out declining by 2.6% y-o-y for the first half 2018 calendar period.
Nevertheless, as Sunway REIT’s financial year ends in June, its total pay-out for the financial year ended June 30 was in actual fact higher by 4.1% as it had distributed a higher pay-out in the 1H of it’s financial year.
The disappointment among the retail REITs is mainly in CapitaLand Malaysia Mall Trust (CMMT) which saw a fall with dividends on a per share basis lower by 2.9%, due to downtime related to asset enhancement works as well as lower rental rates and occupancy for certain properties, according to CMMT.
The trend seen among the retail REITs, which basically makes up much of the REITs sector and the index itself suggests that it is not all gloomy for the retail sector as the premier malls in the Klang Valley are still striving well, judging by their higher dividends y-o-y.
In the industrial REITs segment, the 1H performance in terms of dividends per share declared was mixed with Axis REIT showing a contraction of 8.8% but Atrium declared an 8.1% increase in total dividends. In Axis REIT’s case, the lower dividend was mainly due to lower realised earnings as well as higher number of shares outstanding after issuance of 125 million new shares in November 2017. Atrium, on the other hand, saw an increase in rental income as well as reduction in expenses, which boosted its distributable income.
There was a mixed performance among other Focus REITs, with YTL Hospitality REIT showing a growth in dividends per share of 3.6% y-o-y for the 1H calendar year while both UOA REIT and Al-’Aqar Healthcare REIT saw dividends per share lower by 3.3% and 1.3% respectively. In Al-‘Aqar Healthcare REIT’s case, the lower pay-out was despite a jump in net earnings of about 9.4% while in UOA REIT’s case, the reduction in realised earnings and distribution was mainly due to a 2% drop in rental which did not correspond to a similar decline in expenditure, which fell by 1%. YTL Hospitality REIT on the other hand, had a strong growth in not only top line but a reduction in property expenditure as well.
Overall, the Malaysian REITs sector is on a healthy growth path and the matured assets are indeed able to withstand the challenges faced by REITs’ operators. It is only a question of time when the REITs Index performance will again turn positive for the year as its fundamentals remain intact, thanks to excellent REITs managers’ ability to sustain growth in a challenging market landscape.