In 2011, Teh Hooi Ling wrote an intriguing article ‘The REIT Myth Busted’ on The Business Times. She pointed out among 17 REITs with a listing history of four years, 14 of them issued a cash call (rights issue). Teh stated that for many of the REITs, their cash calls exceeded the dividends paid to shareholders. In other words, whatever the REITs pay out in dividends, they ‘take it back’ in the form of rights issues.
Calvin Yeo, a REIT investor, responded to Teh’s article with his own ‘Is the REIT Myth Busted?’. He pointed that Teh’s article does not consider that an investor can choose not to subscribe to the rights issue. An investor basically also has the option to sell the nil-paid rights, which are given free, to earn additional income. Of course, by doing that, the investor must be prepared to have his shares diluted.
So do REITs really offer a steady stream of dividends and overall gains – even if they issue rights time and again?
To find out, I decided to do a study on Singapore REITs that IPOed prior to 2007 and find out what their total returns were from its IPO date till now (Feb 2016). With at least near ten years of listing history, I think the timeline is reasonable enough to judge the REITs’ overall long-term performance.
There are 19 Singapore REITs that IPOed in 2007 or earlier. In this study, I assume that John (a fictional character) invests in all of them from the day a REIT listed. Since John is a hard-core income investor, he doesn’t subscribe to any rights issue (if any) and is prepared for any share dilution. Let’s also assume that John also forgets to sell his nil-paid rights from which he can make a profit from (unsavvy fella he…).
After investing for more than ten years, here is John’s portfolio performance:
+ Data drawn from SGX.com, ShareInvestor.com and respective REITs’ annual reports. Calculation doesn’t take into account individual taxes, brokerage fees and other charges incurred. * AIMS AMP REIT & Saizen REIT share prices were adjusted based on a pre-consolidated 5 for 1 basis.
Out of 19 Singapore REITs, John made money in 15 of them. The table clearly shows John is very profitable — despite not participating in any rights issue or selling any nil-paid rights.
His biggest winner is Ascendas REIT (A-REIT). He bought A-REIT at 88 Singapore cents at the IPO. Since then, A-REIT has paid a total distribution of S$1.674 per share. This dividend alone is 190% of John’s initial cost in A-REIT. Simply said, John made back his capital (and more) and he is still entitled to a steady stream of future dividends! Should he decide to sell A-REIT, he would also record a tidy 173% gain in capital appreciation. Cumulatively, his total investment return in A-REIT is 363%. Every $10,000 John invested is now worth $36,300.
Similarly, his investments in CapitaLand Mall Trust and First REIT would have generated returns of 268% and 258% respectively — and positive returns in 12 other REITs as well. And as part and parcel of his investment journey, John also made a few mistakes and he lost money in LMIR Trust, Frasers Commercial Trust, AIMS-AMP REIT, and Saizen REIT.
The Fifth’s Perspective
In conclusion, this study made me realize two things:
- Singapore REITs are indeed income-producing assets and should be part of an income portfolio as dividends alone made up 70% of the total returns in this study
- Not all cash calls made by REIT managers are bad moves. Sometimes, a rights issue is needed to acquire new properties to grow the REIT. In assessing this, investors should analyze each acquisition based on its individual merits.
A final note: You shouldn’t buy/avoid a REIT from the table above simply because of its past performance. As fund managers always like to remind us, past performance is not necessarily indicative of future results.
It’s highly important to have a proper investment process to help you identify and invest in the right REITs that will give you a continual stream of passive income and capital gains down the road.