3 Reasons REITs Still Deserve a Place in Your Portfolio

2021-03-16     thesmartinvestor
3 Reasons REITs Still Deserve a Place in Your Portfolio

Investors are witnessing a nascent recovery as several COVID-19 vaccines are being distributed around the world.

There is optimism that leisure travel should soon resume by the second half of this year, as airlines and cruise companies prepare a set of protocols and processes to ensure passengers are safe.

Once the World Health Organisation declares that the world is safe from the coronavirus, governments will be able to reopen their borders and travel can resume once again.

As we look to the future, REITs should continue to feature prominently in investors’ portfolios due to their unique characteristics and strengths.

Here are three reasons why REITs still deserve a place within your investment portfolio.

Safety and resilience

REITs are composed of a portfolio of real estate assets that are bundled into a security that can be bought or sold on the stock exchange.

As such, physical real estate are hard assets that should hold their value even during a crisis, especially if the properties are well-located and enjoy high demand from tenants.

This attribute offers safety and resilience for unitholders as it is unlikely that the value of a REIT will go to zero.

As an example, Ascott Residence Trust (SGX: HMN), or ART, a hospitality REIT, reported a 28% year on year fall in revenue for 2020 as COVID-19 badly impacted its operations.

Distribution per stapled security plunged by 60% year on year to S$0.0303.

Despite this, unitholders will do well to remember that ART owns S$7.2 billion worth of assets across 86 properties within 15 countries.

These quality assets should stand the REIT in good stead when the recovery kicks in and should offer unitholders peace of mind that the REIT will continue to do well.

Still paying dividends

Compared to normal businesses that may need to eliminate dividends to survive through this crisis, the vast majority of REITs have still managed to pay out some level of dividends.

When you invest in non-REIT companies, there is a chance of dividends being eliminated or permanently cut as most will not have a portfolio of income-generating properties that pay a consistent rental income.

REITs, on the other hand, are obligated to pay out at least 90% of their earnings as dividends.

Take Frasers Centrepoint Trust (SGX: J69U), or FCT, for instance.

The retail REIT reported a 25% year on year decline in its distribution per unit (DPU) for its full fiscal year 2020 ended 30 September 2020.

The decline was due to lower footfall as a result of movement restrictions imposed due to the pandemic.

However, unitholders should take comfort in knowing that the REIT still managed to pay out a DPU of S$0.09042 despite having to limit traffic to its malls in 2020.

Better days are ahead.

Also, in FCT’s latest fiscal 2021 first-quarter business update, tenant sales in its portfolio had largely recovered in December 2020, being down just 1.3% year on year.

Unitholders can therefore look forward to potentially higher year on year DPU when the REIT reports its half-year results in May.

Continued growth

REITs still offer tantalizing growth prospects for investors.

They can achieve this through acquisitions, asset enhancement initiatives (AEI) or higher rental reversion (i.e. increasing annual rental rates to tenants).

ART announced the acquisition of a Signature West Midtown, a freehold property used for student accommodation, in the US for US$95 million back in January this year.

The maiden acquisition in the US will expand the REIT’s mandate to include student accommodation assets and will add around 4.4% to ART’s fiscal year 2020 distribution.

ART’s move is a great example of a REIT that still strives to grow despite facing strong headwinds due to the pandemic.

ESR-REIT (SGX: J91U), an industrial REIT with 57 properties located across Singapore, reported a 30.2% year on year fall in DPU as the manager retained income for tenant relief measures.

However, the REIT is pressing on with the AEI of its 19 Tai Seng Avenue and UE BizHub East.

Both AEI are slated to be completed this year and will rejuvenate the buildings to enable them to attract and retain quality tenants.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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