The Litmus test of REIT’s:
What does it mean when we say that REIT’s are performing well? For this we need to understand how REIT’s work.
REIT’s look like their cousin – stocks simply for the reason that they are traded on the stock exchange.
However, the kinship ends here.
The Payout ratio may not always be the barometer of an REIT’s success or good performance. Since REIT’s do not retain earnings, there is no hibernation food or a stockpile for rainy days. This may make them totally at the mercy of how the Trust is performing operationally and there are no reserve funds that can level out the lean years. In simple words, if REIT Y and Corporation Z stand at the same level of business risk, Y’s dividend will be be a dwindling one, because it has no surplus fund butter that can be used to spread out the dividend in the rainy years.
Therefore the parameter of an REIT performing well is not the dividend payout ratio but also the funds from operations (FFO) instead. This is defined as net income less the sale of any property in a given year and depreciation. Simply take the dividend per share and divide by the FFO per share. The higher the yield the better.
Once you have an idea of how myopic your view can be if you just look at the payout ratio, here is time to look at the companies that joined the listing bandwagon in the first quarter of 2018 and also the ones who dropped the shelf and became privatised.
The writing on the wall was made very clear by a report by PwC in 2017 that hinted at a hollowing effect of delistings.
Possible delistings will include companies across all sectors which may choose to be closer to the market they serve and to build product and brand recognition there, as well as those which believe that they are not garnering sufficient value and interest from investors on the SGX. The robust mergers and acquisitions environment and availability of funds will also result in companies being bought over and privatised,” says Max Loh, EY Asean and Singapore managing partner.
