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Article Outline

S-REIT sector performance as a whole

1) Master Leases and Income Support

2) Massive Equity Fundraising

3) Lack of Disclosure & Related Party Transactions

Why a Diversified Approach Can Make Sense

Syfe’s REIT+ Portfolio

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S-REIT sector performance as a whole

Most investors I know of view S-REITs favourably, given the perceived features of high tax-efficiency, defensiveness and a relatively steady dividend stream.

In the past decade, the S-REIT sector as a whole has performed strongly with an annualized return of 8.7% from 2011 to 2021 YTD (see chart below), benefitting from relatively low interest rates via 3 ways:

1. REIT borrowing expense are kept low, resulting in higher profits and higher distributable income.
2. The appraised values of the REIT’s investment properties are more likely to see upward revisions, supporting the REIT’s share price.
3. REIT dividend yields are seen as relatively more attractive than fixed deposit rates or bond yields.

Given this backdrop, it’s easy to forget that performance dispersion within the S-REIT sector can be immense. In past years, we have encountered a few instances where a REIT’s share price has declined more than 70%.

Here, we provide 3 lessons that investors can learn from, to potentially spot such risks.

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1) Master Leases and Income Support

When REITs come to market, it’s not uncommon to see the REIT’s sponsor pledging to provide income support for some or all of the REIT’s assets. This is in theory a good thing, because unitholders get protected from downside risk – at least to some degree.

The real worry is when the income support becomes so extraordinary that the sponsor is no longer able to pay it, or restructures the agreement such that it will no longer have to carry this burden.

In the case of First REIT, an extraordinary income support was written into the master lease agreements for the assets held by the REIT. Given concerns over the trend of depreciating rupiah, the REIT’s rental income had a currency peg which was supported by rental support from the sponsor. As the rupiah continued depreciating over the years, the differential between the income the underlying assets were generating vs the income that the sponsor/master lessee was paying to the REIT became too great for the sponsor to manage.

Here’s an excerpt from sponsor Lippo Karawaci’s announcement on the restructuring of its rental support:

Even before accounting for the decline in revenues as a result of COVID-19, the rental amounts for almost all the hospitals range of 30-100% of the hospital’s Gross Operating Revenue — and with a weighted average of close to 40% — a level that is unrealistic to sustain and support.

Concerns over the unsustainability of the sponsor’s rental support have contributed to First REIT’s 75% share price decline from S$1.058 (adjusted for rights issue) at the start of 2018 to S$0.26 as of today’s date.

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2) Massive Equity Fundraising

There are a few key reasons why REITs may want to raise equity: to raise money to acquire an asset, or to lower their gearing ratio (so that there’s a greater buffer from the regulatory limit), or sometimes both. 

Is equity fundraising a bad thing for shareholders? Not necessarily. Equity fundraising means that the no. of units the REIT has issued will increase. Whether this is good or bad for shareholders really depends on the scale of the dilution COMPARED TO what the REIT plans to do with the money raised.

Equity fundraising can lead to sharp drops in a REIT’s unit price especially when

• There is a rights issue announced with a large discount to last traded share price,
• The proceeds are not used to acquire an asset,
• OR when unitholders are not convinced that the target asset is worth the cost of the fundraising.

The negative impact of equity fundraising can be seen most clearly during the Global Financial Crisis of 2007-2009. With the economic recession, property asset values were appraised lower. This was then reflected on the REIT balance sheets. As REIT asset values declined, gearing ratios increased even without the REIT taking on more debt, causing some REITs to veer uncomfortably close to the regulatory gearing limits. At that time, the Monetary Authority of Singapore’s gearing limit was 35% for unrated REITs and 60% for REITs with credit ratings.

To avoid breaching their regulatory gearing limits, several REITs executed rights issues and/or placements to reduce their gearing. All the REITs in the table below mentioned the use of part/all of the proceeds raised to pay down their debt.  

The result of these equity fundraisings and the extenuating circumstances in 2008 led to a 75% price decline in the S-REIT Index (see chart below) from 21 Jun 2007 to 12 Mar 2009.

The 75% above refers to the performance of an S-REIT Index! To be clear, the individual REIT performance over that period would have varied and some of the REITs listed below may or may not have fallen more than 70% over the period. In general, REITs which issue rights units at steep discounts to last traded prices are more susceptible to sharp declines in share prices.

NOTE: For fair analysis, it’s worth highlighting that this decline happened more than 10 years ago in 2008, and that the REITs today are generally in a much stronger position relative to the new MAS gearing limit of 50%. The timely revision of the MAS gearing limit from 45% to 50% in April 2020 helped S-REITs to avoid a sell-off of the same scale in 2020 compared to 2008.

Takeaway of this section: Individual REITs that conduct rights issues at steep discounts to last traded price and/or are part of DPU yield dilutive transactions stand to suffer significant share price corrections.

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3) Lack of Disclosure & Related Party Transactions

Before a REIT comes to market, they have to go through a rigorous process in order to get listed on the Singapore Stock Exchange. However, there will inevitably be cases of REITs not making important disclosures of potentially problematic issues. Later on, these issues can lead to a precipitous fall in the REIT’s share price.

In such cases, it can be very difficult to spot what’s wrong with the REIT’s unless one conducts thorough due diligence with third parties on the various assets, transactions, and personnel.  

In the case of Eagle Hospitality Trust, based on a recent lawsuit by shareholders, it has been alleged that the REIT manager failed to disclose the following (among other things) in a timely and complete manner:

• …failure of the master lessees to pay security deposits totalling US$43.7m as well as monthly rentals on time
• …potential conflicts of interest involving Mr Stubbe who, while serving as an independent director reviewing a valuation report by Jones Lang LaSalle Americas (JLLA), was also negotiating senior employment with Jones Lang LaSalle Property Consultants (JLLPC)
• …other “material information”, such as the resignation of a senior finance personnel, non-disturbance agreements that the master lessors (subsidiaries of EH-Reit) had entered into, the manager’s failure to maintain minimum capital and financial resources, and other defaults and liabilities.
• And more, as quoted in this article by The Business Times

The REIT is currently suspended. Since its IPO price of 78 US-cents in May 2019, the REIT has fallen 82% to its current price of 13.7 US-cents.

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Why a Diversified Approach Can Make Sense

REITs on the whole are still an important asset class, especially for investors keen on dividend returns.

The tricky part comes in DIY investing for REITs. While REITs do tend to be more stable compared to let’s say small cap stocks, there will still be important circumstances which can cause REIT share prices to take a nosedive.

An important way to mitigate these risks is to have a diversified portfolio. With a diversified portfolio, the impact of a poor performance from a single REIT will have a much smaller impact on the whole portfolio’s returns. Of course, it’s possible to construct a diversified portfolio yourself (by buying the REITs individually), but there’s a significant amount of administrative hassle. To construct a DIY portfolio of 20 REITs, if you assume an average of one corporate action per REIT per year, you’d be answering to 20 corporate actions and all of the attendant hassle.

So for diversified portfolio, there are two key options:

• Buy into a REIT ETF
• Syfe’s REIT+ Portfolio

What’s Syfe’s REIT+ portfolio? It’s an investment offering that closely replicates the performance of the SGX iEdge S-REIT Leaders Index. Launched in collaboration with the SGX, the portfolio holds 20 of the largest REITs in Singapore such as Mapletree Logistics Trust, Ascendas REIT, CapitaLand Integrated Commercial Trust and more. 

Syfe REIT+ is well diversified as it provides exposure to all real estate sub-sectors – retail, commercial, industrial, healthcare and hospitality. Each REIT holding within the index is also capped at a 10% weightage to help investors avoid the risk of being overexposed to any one REIT.

In 2020, the portfolio generated a dividend yield of 4.5%. For 2021, the estimated yield looks to be 5.1% according to Syfe. 

To be honest, when Syfe’s REIT+ portfolio came to market, we were a bit sceptical! What could be the value-add versus buying an ETF? Plus, wouldn’t REIT+ be more expensive than an ETF?

To our surprise, Syfe’s REIT+ portfolio actually has LOWER all-in fees compared to the REIT ETFs available on SGX. See below. 

In addition, there’s a risk management option for those investing in the Syfe REIT+ Portfolio. Basically, this risk management option allows Syfe to dynamically allocate a certain proportion of the invested cash to the NikkoAM ABF Singapore Bond Index Fund.  With regard to the March sell-off in 2020, Syfe’s risk management methodology tactically allocated around 50% of the risk-managed REIT+ portfolio to the bond index fund. This helped to cushion the impact of the sell-off on the portfolio (blue line), as compared to the iEdge S-REIT Leaders Index (light grey line). 

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Syfe’s REIT+ Portfolio

If you have more questions about which Syfe REIT+ portfolio option you should choose, we recommend that you book a complimentary call with Syfe’s wealth experts, or attend one of their regular webinars. In fact, there’s one with SGX coming up next Thursday on 22 July.

We think Syfe REIT+ makes sense for investors seeking a diversified REIT portfolio. There is no minimum investment, no lock-in period, and you can withdraw your funds anytime you want. There are no brokerage charges as well, so there’s nothing to stop you from dollar cost averaging into your REIT+ portfolio (most local brokers charge around $10 – $25 in commissions per transaction). 

Keen to start investing with Syfe? Create your account with the code INVESTQUEST to enjoy free management fees on your first $30,000 investment for 6 months.