ANALYSIS: How Consistent Are Reits’ Dividend Returns In Volatile Markets?
Asia Pacific REITs’ dividend returns ranged from 3.8% to 9.8%, with an average yield of 6.0% between 2000 and 2020. Given the wide-ranging payout rate, an active approach is required to enhance investment portfolio return.
By Patrick Ma, Director, Listed Products and Research, Admiral Investments
Nov 28, 2022 – There seems to be an investment truism that “REITs go down when interest rates go up.” This thinking appears to be valid, given that cap rates are significant drivers of REIT valuation.
With the U.S. Federal Reserve seen keeping interest rates rising, albeit at a slower pace, until 2023, some investors may opt to stay away from REIT investments.
However, we analysed the price and the dividend return of global and Asia Pacific REITs. Specifically, we analysed the share price change of REITs over a calendar year and their dividend return calculated as gross total return minus price return. Our dividend return took into account dividend reinvestments. Our findings showed that:
- Despite price volatility, REITs have consistently delivered cash dividend payouts. For instance, during 2008, when the asset class had its most significant drawdown on record, with global REITs down 48% and Asia Pacific REITs falling 52%, most REITs still pay out dividends. That year, global REITs returned 3% in dividend return and Asia Pacific 3.6%.
- To further illustrate the impact of cash dividend payouts on portfolios, we look at Asia Pacific REITs’ performance in the past 12 months to September 30, 2022. Using the GPR APREA Composite REIT Index as a reference, a US$1 million portfolio invested in September 2021 will generate a cash dividend payout of US$10,495 in the first three months of investment and a total cash dividend payout of US$38,984 for the 12 months ended September 2022. During the same period, the portfolio would fall by 26% to US$735,186.
- While REITs have consistently provided dividend returns to investors throughout different capital market cycles, the level of payout fluctuates. For example, global REITs’ dividend returns in the past 20 years (2000-2021) have ranged from 3.8% to 8.9%, with an average dividend return of 5.7%. In the same period, Asia Pacific REITs’ dividend returns ranged from 3.8% to 9.8%, with an average yield of 6.0%.
Assuming a REIT pay out 100% of its income as cash dividend, this payout can be determined by the following formula:
Cash dividends = Gross rental income – property expenses – SG&A (Selling, General and Administration) expenses – interest payments – tax payments
Each of the components above may be determined by the factors described below:
- Gross rental income – determined by rental trends of the properties in the REIT portfolio and various actions by the management in enhancing portfolio return, including asset enhancement, acquisitions and disposals.
- Property expenses/SG&A expenses – highly related to rental income but also subject to management’s ability to control costs
- Interest payments – determined by the gearing of the REIT as well as the prevailing interest rate
- Tax payments – determined by the tax regime where the REIT operates
From the above formula, we can see that monetary and economic conditions will impact REITs’ cap rates and gearing/interest coverage, affecting unit price performance. Thus, it is unsurprising that most investors see interest rates as the primary driver of REITs’ valuation.
Our analysis also showed that a REIT asset mix, underlying rentals, valuation, cost management and asset enhancement would affect its cash dividend payout and growth. Notably, the REIT manager plays a significant role in influencing these factors.
To a great extent, the wide-ranging cash dividend yield of different REITs can be explained by the variability of decisions by managers on portfolios and asset/liabilities management, and even the REIT’s gearing level.
In conclusion, during market volatility, investing in REITs helps to diversify portfolio risks, given that the asset class has consistently delivered cash dividend payouts to shareholders. However, the level of cash dividend returns will differ from REIT to REIT because the payout ratio is determined by multiple factors. These factors include the macroeconomic conditions at the time, with interest rates and economic growth outlook being the significant drivers, and management-specific factors, such as decisions on asset mix, acquisition and disposal, and cost management.
Given that each REIT is different, an active approach in selecting better-positioned and better-managed REITs will further improve and strengthen investment portfolios.