REITs: The less volatile investment

Almost two years and six initial public offerings later, real estate investment trusts (REITs) have proven to be a less volatile investment vehicle and a regular source of dividend income even during a pandemic.

Five REITs listed at the Philippine Stock Exchange paid out a total of P5.77 billion in cash dividends last year, resulting in 2.16 percent dividend yield, even as three of the five REITs were only listed for an average of four months as of the end of 2021.

COL FInancial REIT Snapshot

Today, there are already six listed REITS: AREIT, Inc., DDMP REIT, Inc. (DDMPR), Filinvest REIT Corp. (FILRT), RL Commercial REIT, Inc. (RCR), MREIT, Inc., and Citicore Energy REIT Corporation (CREIT). One more, Vista REIT, is in the pipeline.

Of these REITs, almost all hold an office or commercial leasing portfolio while it is only CREIT is a renewable energy-focused company holding a portfolio of solar farms.

COL Financial said the first two REITs to go public have so far provided the highest growth in dividend yield while the others have just begun to declare cash bonuses. AREIT has chalked up a 15.82 percent growth in dividend per share followed by DDMPT with 15.52 percent.

PSE President & CEO Ramon S. Monzon

“REITs have become a preferred asset class among investors because of its dividend mandate. With more REITs expected to list this year, including non-property REITs, investors will have a wider selection of companies that can provide passive income,” PSE President Ramon S. Monzon explained.

A REIT is a stock corporation put up to own income-generating real estate assets with regular earnings from rent and usage fees such as apartment or office buildings, medical facilities, hotels and resorts, highways, warehouses, shopping centers, railroads, among others.

For property companies, transferring these assets into a REIT allows them to raise fresh and cheaper funds that can be used to finance acquisitions, development and expansion projects without losing majority control over these assets.

In a way, by offering REIT shares, they are converting future earnings into instant cash since the stock market usually prices shares about 15 times their annual earnings.

For investors, a REIT is a type of investment instrument that provides a return derived from rental income of the underlying real estate asset distributed through dividends, making them comparable to securities such as bonds with the added bonus of the possibility of share price appreciation.

The purchase of shares of stock of REITs allows investors, especially small or retail investors, to participate in the ownership of a portfolio of different properties, locations and property types at a fraction of their cost.

It is like being the landlord of multinational companies in various prime locations minus the headache of operating them.

As an investment, REITs attract many investors because of the assurance of dividends. As mandated by law, investors can expect to receive annually 90 percent of a REIT’s distributable income as dividends.

Aside from allowing investors to earn passive income that’s potentially higher than yields from time deposits and government bonds, a REIT is able to give a better yield because its income is exempt from the 30 percent corporate tax.

Unlike most hard assets or fixed income securities, REITs have market liquidity, so investors can easily buy and sell REIT shares through the PSE.

Another advantage of REITs is that, since they are publicly-listed, they are subject to increased disclosure and other requirements of regulators, thereby generating more transparency and lessening perceived risk.

Philstocks: REIT Performance

On top of cash dividends, Philstocks Financial said REITs also provide capital gains from the appreciation in their share prices.

REIT share prices have gained an average of 12.23 percent from their IPO prices, except for DDMPR which has dropped 29.78 percent, while AREIT leads the pack with a 70.19 percent gain.

COL said AREIT’s strength lies in its having the “best in class sponsor with long growth runway” and, AREIT, FILRT, MREIT, and RCR and CREIT all have high growth potential through infusion of more assets from their sponsors’s huge portfolios.

In the case of DDMPR, COL noted that, while it has a high projected dividend yield, there is “occupancy risk due to high exposure to POGOs (Philippine offshore gaming operators).” The downside of REITs is that it will give out lower dividends if rental demand weakens, resulting in higher vacancy and lease rates.

This is why investors should check the reputation of the real estate company sponsoring the REIT and look carefully at the quality of assets the REIT holds and see if they are located in prime locations with good access and if the building enjoys fiscal incentives from the government.

They should also look at the quality of the REIT’s tenants and how long before the lease of existing tenants expire as well as the REIT’s potential for growth based on the assets of the sponsor which could be infused into it later.