Reit distributions to fund your retirement may be less than what you anticipate

Singapore

SINGAPORE-LISTED real estate investment trusts (S-Reits) have been a favourite asset class for investors in search of income.

But those hoping to retire with a portfolio of Reits should be mindful of future demands for cash infusions.

S-Reits and property trusts have an average 12-month dividend yield of 6.4 per cent, according to data by Bloomberg and the Singapore Exchange (SGX) as at Jan 31. This dwarfs the average 3 per cent yield from the benchmark Straits Times Index (STI) over the same period.

But some S-Reits have also been active in raising money from investors via rights issues and preferential offerings - which is not factored into dividend yield calculations.

Taken to the extreme, a handful of S-Reits have even paid out less in total distributions to unitholders than the total amount they have raised from unitholders - even though they show positive dividends yields and total annual returns figures.

IReit Global, for example, has paid out total distributions to unitholders amounting to some 159.5 million euros (S$239.3 million) since its initial public offering (IPO) in 2014.

In this time, the Europe-focused real estate investment trust (Reit) has raised from unitholders a total of S$352 million.

Last year, IReit Global launched an equity fund raising exercise, which included raising S$120 million from a preferential offering, to help fund its acquisition of 27 retail properties in France developed by sporting goods giant Decathlon.

In 2020, the Reit had also launched a rights issue to raise gross proceeds of S$143 million. This was used to finance the acquisition of the remaining 60 per cent interest in a portfolio of 4 multi-tenanted office buildings in Spain and for the repayment of a loan in relation to its investment in these properties.

Also, back in 2015, shortly after its IPO, IReit Global had announced a rights issue to raise gross proceeds of nearly S$89 million to help fund its maiden acquisition of an office property in Germany.

Rights issues and preferential offerings are invitations to existing unitholders to purchase new units in the Reits. With preferential offerings, also known as non-renounceable rights, unitholders are not allowed to sell this invitation to another party. Rights, on the other hand, are often transferable, and can be sold on the open market.

In the example of IReit Global, this means an individual retail investor who had taken the Reit up on its 3 rights issues and preferential offerings could potentially find himself having forked out more cash to pay for these new units than he had earned from distributions to unitholders.

According to Bloomberg data, IReit Global has an annualised total return of 5.9 per cent since its listing. The Business Times has reached out to the manager of IReit Global for comment.

RHB analyst Vijay Natarajan said such situations are "not a concern". The way he sees it, newer and smaller Reits may face this issue as they start with a relatively small portfolio size and need to make large strategic acquisitions to grow.

"Along with the distribution amount, investors should also take into consideration the adjusted net asset value (NAV) growth over this period of time to get a better picture of how the Reit has performed over the years," Natarajan said.

Temasek-backed Keppel Reit, for example, had been fairly active in asking unitholders for money in its earlier days.

With a current capitalisation of S$4.5 billion, which ranks it among the top 10 largest Reits in Singapore, Keppel Reit has raised almost as much money from unitholders as it has paid out in distributions.

While it has paid total distributions to unitholders amounting to S$2.21 billion, the commercial property Reit has also raised S$2.16 billion from unitholders.

Keppel Reit, formerly known as K-Reit Asia, in 2011 launched a rights issue to raise gross proceeds of S$984 million - which remains one of the top 3 largest rights issues in the history of S-Reits.

The Reit in 2008 and 2009 had also launched rights issues to raise gross proceeds of S$552 million and S$620 million, respectively.

But Keppel Reit has not announced any rights issues or preferential offerings for more than a decade since its last rights issue.

The way Natarajan describes it, Reits are capital intensive by nature and it should therefore come as no surprise to unitholders that Reit managers raise equity to fund acquisitions that add value to their existing portfolios.

"Reits distribute almost all of the income earned from its underlying assets to maintain tax exemption status and therefore hold limited cash and have gearing limits to adhere to. Thus it becomes imperative for Reits as instruments to tap various funding sources such as debt, perpetual securities and equities from time to time to grow its portfolio," he added.

Two other S-Reits that have also raised sizeable amounts from unitholders are Manulife US Reit (MUST) and OUE Commercial Reit (OUE C-Reit).

MUST has launched either rights issues or preferential offerings for 3 successive years between 2017 and 2019, raising a total of US$468 million. It launched a rights issue to raise gross proceeds of US$208 million in 2017, and preferential offerings to raise US$197 million and US$63 million, respectively, in the following 2 years.

Since its IPO in 2016, MUST has paid distributions to unitholders amounting to US$372.9 million.

"S-Reits in general have a 20 per cent mandate for private placements and up to 50 per cent for rights and preferential offerings. When we first got listed in 2016, our market cap was close to US$500 million. That translated to a placement size of approximately US$100 million. That amount will not allow us to buy quality assets and hence, we used a combination of placement, rights issue (in 2017) and preferential offering (in 2018 and 2019) as part of our equity fund raising," said Jill Smith, chief executive officer of the manager of MUST. "At US$1.2 billion market cap now, our 20 per cent placement mandate will allow us to raise up to US$240 million, and we now have greater flexibility on our funding options," she said. "As they say, size matters; and equity wise, it is definitely true. We are grateful that for a Reit our size, we have been getting very strong support from our investors who want us to grow."

Smith added MUST had stuck to its word of acquiring only accretive deals, and has generated total returns of 23 per cent since its IPO. According to Bloomberg data, this translates to an annualised total return of 3.2 per cent for the US office-focused Reit since its listing.

Meanwhile, OUE C-Reit, which made its trading debut in 2014, had launched 2 rights issues in 2015 and 2018 to raise gross proceeds of over S$218 million and nearly S$588 million, respectively.

The Reit, which has paid S$643.4 million in distributions to unitholders over the years, has an annualised total return of 0.6 per cent since its listing, according to Bloomberg data. BT has also reached out to the manager of OUE C-Reit for comment.