Investment Insights

Real Estate Investment Trusts: Built for Income

30 June, 2020

The REITs Proposition

A Real Estate Investment Trust (REIT) is a company that owns or finances income-generating real estate. In this current day, investors can choose from a variety of REITs whose underlying real assets are properties housing commercial, retail, hospitality, and even industrial businesses. Recently, medical facilities and data centers have been added to the mix. A particular REIT does not have to specialize in one area and could also own properties tenanted by businesses from other sectors.

REITs are set up in a way which allows investors to access real property assets.  A prime benefit would be income. REITs around the world have been given favorable tax conditions (varies from country to country) by the resident governments and hence are able to distribute to shareholders a large amount of their rent collected from tenants. This amounts to Global REIT dividend yields dwarfing global equity yields and global government bond yields (Chart 1).

CHART 1: Yield of Global REITs are much higher than Global Equity and Global Government Bonds (%)

Chart 1 Source: FTSE Russell as at 29 May 2020. Past performance is no guarantee of future results. Equity: Trailing 12 Months Dividend Yield. Bonds: Yield to Maturity. Global REITs refer to the FTSE EPRA NAREIT Global Index. Global Equity refers to the FTSE All-World Index. Global Government Bonds refer to the FTSE World Government Bond Index. 

REITs are typically listed on a stock exchange, is liquid and traded like any other security. Hence, should investors be optimistic about the prospects of the underlying assets, the REITs’ stock price could be bid up. Investors are therefore able to benefit from both income collected and stock price appreciation. 

Due to the ongoing global hunt for yield, investors have been naturally interested in Asia Pacific ex Japan’s ability to generate globally beating yields (The FTSE EPRA NAREIT Asia Pacific ex Japan Index is yielding 5.34%). It is therefore no surprise that Asian REITs’ listings have grown strongly over this decade. Within the S&P Asia Pacific Ex-Japan REIT index, the total number of listed REITs have increased by 36% and the market capitalization has grown by 122% from 2010 to June 2019.

However, despite its remarkable growth trajectory, there remains significant potential for REITs across the Asia Pacific region. Longer term themes like globalization and urbanization are paving the path for increased infrastructure, growing economic activity and rising consumption. Additionally, there is a huge opportunity for global investors to participate in government asset recycling programs. In these initiatives, governments are selling physical assets to the market to make funds available for fiscal spending needs. Governments tend to sell these assets at attractive valuations to encourage investment in the sector. This presents an enormous opportunity for global investors. 

Defying Size: The success of Singapore REITs

Singapore, which launched its first REIT in 2002, has 35 REITs, six stapled trusts and two property trusts and at the end of 2019. This is incredible growth for a country without a large land base. Two areas have propelled the growth of Singapore REITs.

Firstly, the yield of Singapore REITs are relatively high when compared to global REIT yields (Chart 2). This is made possible as Singapore REITs are required to distribute at least 90% of taxable income each year to enjoy tax exempt status (subject to certain conditions).

CHART 2: Chart 2:Dividend Yield of Singapore REITs is globally competitive (%)

Chart 2 Source: Developed World ex US REITs refer to FTSE EPRA NAREIT Developed ex US Index. Global ex US REITs refer to FTSE EPRA NAREIT Global ex US index. North America REITs refer to FTSE EPRA NAREIT North America index. Eurozone REITs refer to FTSE EPRA NAREIT Euro Zone Index. Asia Pacific ex Japan REITs refer to FTSE EPRA NAREIT Asia Pacific ex Japan Index. Australia REITs refer to S&P/ASX 200 A-REIT index. Singapore REITs refer to iEdge S-REIT Index. Data as at 29 May 2020. 

Secondly, the country’s political stability, advantageous tax regime and proven legal system makes it particularly appealing for international investment trusts. To gain an edge in this area, Singapore authorities understand that they must be commercially flexible and open to updating its regulations. For example, overseas investor participation increased when withholding taxes were reduced recently. Other adjustments currently under consideration include changes to debt levels, part ownership of assets and improvements in disclosure requirements and corporate governance practices.

Singapore is currently home to both foreign and local REITs from healthcare, hospitality, office, residential, retail, data centers and industrial sectors.

Mapletree Industrial Trust (MIT)

MIT is a real estate investment trust involved in the ownership and management of industrial properties across Singapore and North America. In terms of total value and square footage, most of the company's real estate portfolio comprises multi-tenanted flatted factories, Hi-Tech buildings, and business park buildings. MIT generates revenue in the form of rental income derived from the leasing of its industrial facilities in medium- to long-term leases. The company's flatted factories account for the majority of this rental income. Mapletree Industrial's customer base encompasses a variety of companies engaged in manufacturing and wholesale and retail trade activities. In addition, MIT recently acquired stakes in data centers in the US and Canada. Management understands that broadening its reach is key to achieving stable cash flow through its 114 properties, which has stable and high occupancy rates (Chart 3) and a large diversified tenant base of more than 2,200 tenants across different sectors (Chart 4)
CHART 3: Stable Segment Occupancy Levels (%)

Chart 3 Source: Company website, Investor Presentation, May 2020

CHART 4: MIT’s diverse sector exposure (% of Gross Rental Income)

Chart 4 Source: Company website, Investor Presentation, May 2020. Others include Education, Health, Social Services, Arts, Entertainment, Recreation, Accommodation, Food Service, Construction and Utilities, Transportation and Storage.

Financially, MIT looks to be in great shape with rising earnings and free cash flow (FCF) over the last 5 years (Chart 5). This has led to relatively high dividends and growing distributions (Chart 6,7)
CHART 5: MIT’s earnings and FCF have been well managed.

Chart 5 Source: Company website, Investor Presentation, May 2020.. 

CHART 6: MIT’s dividend yield has been stable and is relatively high when compared to global asset classes (%)

Chart 6 Source: Bloomberg. Data as at 11 June 2020. Asia Pacific ex Japan Equity refers to MSCI Asia Pacific ex Japan Index. Europe Equity refers to MSCI Europe Index. US Equity refers to MSCI US Index. Global Equity refers to MSCI World Index. US Corporate Bonds refer to Bloomberg Barclays US Corporate Total Return Value Index. Global Bonds refer to Bloomberg Barclays Global-Aggregate Total Return Index.

CHART 7: Growing distribution per unit (Singapore Cents)

Chart 7 Source: Company Website. Data as at 31 March 2020. 

Management has also exhibit prudence in producing a strong balance sheet where gearing is at 37.6% and interest cover at 7.7x as at 31 March 2020. These are industry leading numbers which allow MIT to scale up if needed during an economic boom or remain incredibly solvent during an environment of economic stress such as today. In fact, in its most recent result announcement in March 2020, management retained S$6.6 million of income available (equivalent to distribution per Unit of 0.30 cent) in view of the uncertainty from the COVID-19 pandemic. Had the tax-exempt income distribution been included, the distribution per Unit for FY19/20 would be 12.54 cents instead of 12.24. 

The Bottom Line

The outlook for REITs in Asia is positive given the long-term population and urbanization-led growth trends across the region. REITs are an attractive asset class with lower volatility, above-market dividend yields and provide exposure to high-quality property assets with steady growth. Backed by tangible real assets, income focused investors can invest alongside long-term population and demographic growth and be less worried about short term market volatility and sentiment. 

Source: Legg Mason and Martin Currie. Data and estimates as at  29 May 2020 unless otherwise stated. 

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