Singapore REITs in the First Quarter of 2018
When it comes to REIT’s ( Real Estate Investment Trusts), there is myopia.
Distant things appear small and hazy, a closer view, a bigger view makes things better.
To come out of this myopia, we need to understand what good performance and bad performance with respect to REIT’s.
The litmus test of REITs
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 ‘T’ in REIT is significant. It is the game changer that differentiates REIT’s from stocks. It stands for Trust. Since Trusts are not taxed the way corporations are, they distribute substantially all of their profits to the unit holders as dividends. So, good performance of a REIT is its 100 % payout ratio from pre-tax earnings which dividends from the equivalent of pretax earnings. However, this may sometimes be misleading.
The Payout ratio may not always be the barometer of a 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 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 a 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, there 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 privatized.
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 a 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 privatized,” says Max Loh, EY Asean and Singapore managing partner.
Performance of REITs in Q1 2018 in Singapore- the halo or the hollow?
In the year-to-date, the SGX S-REIT Index, comprising all REITs listed in Singapore, has declined close to 6.3% on average. This is offset by its 6.5% per annum yield that the REITs pay out on average.
The five largest REITs on SGX are Ascendas REIT, CapitaLand Mall Trust, CapitaLand Commercial Trust, Suntec REIT, and Mapletree Commercial Trust, and they have a combined market capitalization of about S$30 billion. They are categorized by GICS under the Industrial, Retail and Office REIT sub-segments.
New listings on SGX in 2018 – the halo
The new listings in 2018 have been a halo effect of the stellar performance of some companies in 2017. REITs continued to be a niche on the SGX owing to the REIT’s being known for their nimble and agile nature for Singapore investors.
Let’s take a look at four new listings in SGX in 2018 and how their report card looked in Quarter 1 of 2018.
Memories Group Limited (SGX: 1H4)
Memories Group Limited engages in tourism-related activities in Myanmar through three segments: Experiences, Services, and Hotels. On its first day of trading on 5 January 2018, the counter surged almost 30% to close at $0.37.
LY Corporation Limited (SGX: 1H8)
LY Corporation Limited, an investment holding company, designs, manufactures and sells wooden bedroom furniture primarily in Malaysia. With a 72% stake in the company, the founding family continues to have a majority interest in LY Corporation. The stock’s highest price so far was $0.37.
Sasseur Reit (SGX: CRPU)
Sasseur REIT offers investors exposure to Chinese retail outlet mall sector, with an initial portfolio of four malls in Chongqing, Bishan, Hefei, and Kunming.
Ayondo Ltd (SGX: 1I5)
Headquartered in Europe, Ayondo provides trading and investment solutions through its online platforms. The company has operations in the United Kingdom, Germany, Spain, Switzerland, and Singapore.
Ayondo’s listing was oversubscribed 4.5 times and marks the first pure-play FinTech company to debut on SGX.
REIT’s Delisted in 2018- the hollow
The halo effect romped with a few of the REIT’s delisting. For instance, WEIYE HOLDINGS LIMITED (SGX:BMA) and AUSNET SERVICES LTD (SGX:AZI) have been delisted with effect from 2018-08-24 and 2018-07-16 respectively.
REIT To be Delisted
Two REITs, ESR-REIT and Viva Industrial Trust are set to be merged to form the fourth largest industrial REIT in Singapore, with combined assets of close to $3 billion.
Under the merger scheme, shareholders of Viva Industrial Trust will receive $0.96 per unit. This is 8% higher than its closing price of $0.89 on Thursday (17 May 2018). The $0.96 will be delivered to shareholders in cash (10%) and new ESR-REIT units (90%) at a rate of $0.54. This rate is, however, a premium of 2.9% to ESR-REIT’s closing share price of $0.525 on Thursday (17 May 2018).
Currently, the proposed merger has been approved by shareholders and Viva Industrial Trust set to be delisted from SGX at a later date.
The Road Ahead:
In spite of all the clamor of the hollowing effect of the delistings, the outlook for the Singapore IPO market remains positive, and there is a continued pipeline of companies wanting to list on the SGX. SGX is still being seen as the accelerator to growth and consequently, Ultimately, local entrepreneurial companies have a penchant to list on SGX as a platform for growth.
While looking at the REIT report card for the first quarter of 2018, we need to, seriously get rid of myopia.
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