Phillip SGX APAC Dividend Leaders REIT ETF

[yeokiwi]

In my opinion, the Singapore REITS system is broken.

1) Many REITS here pay only the interest and rollover the principal
2) Many properties here are leaseholds
From 1) and 2), when leases of these properties expire, what are REITS going to do? No property but got principal to repay

IMO, it will be a matter of time before banks will ask REITS to switch to an amoritsing loan structure instead of bullet loan. This will affect dividends cashflow

3) Due to capitalization rate valuation being used, many valuers are using very low cap rates relative to historical numbers. Once normalised cap rates numbers are used again. The result: asset prices fall, debt amount remains the same; leading to higher leverage ratio. In such situation, MAS will have to either relax the rule, or REITS raise rights which dilutes current shareholders. It is unlikely revenue will increase enough to offset fall in asset prices

Therefore, while it seems nice that REITS are yielding 4 to 6% in the current low interest environment. One has to seriously think about the future implications.

I do agree in general. But, the REITs can also sell away the properties before the leases are up.
The banks lend money based on the valuation of the properties. In the foreseeable future, the properties' valuations will drop and the REIT will be forced to raise money via right issues to repay the debts.
So, I think it will not be a big bang at the end of the lease. Rather, before the end of lease, the unit holders will be asked to cough up money from time to time to maintain the gearing and the yield.

[Debronic]

The term "Dividend Leaders" is a misnomer considering this ETF is 100% REIT driven. Distributions are not dividends and in current low interest rate environment, it is simply not possible for a broad based index focused in AU, HK and SG to generate 5.19% "dividend yield".

Asset managers have deliberately conflated the two distinctive financial terms in their self-promotion. This is a potential major hazard down the road as I understand a lot of retired senior citizens are living on such "dividends" under the wrong impression that they are safe and sustainable.

Care to explain to me why distributions are not the same as dividends? 
Why do you say that these dividends are not safe & sustainable?

To answer your question, one would need to look into each and every REIT on their "capital structure" (gearing, type of loans etc). A dividend is defined as a distribution out of excess earned profits, rather than out of capital. So even though some of the leasehold type of Trusts disguise their "return of capital" as profits, it should still be considered dividends, based on the definition.

"Safe" is a really relative term. So unless we have a reference point for "safe", then there is no point to start a discussion here, since all of us have different notions for it.

I reckon a lot of retired senior citizens were once regular salary-receiving employees. This explains why they would continue to seek "regular dividends" from their investments, when it should be very clear to them, that along the way as they aged, they should have observed that the really rich people are the ones who focus capital gains over dividend payouts. For those retired senior citizens whom have held the big caps/blue chips (low dividend yield when they purchased it donkey years ago, but has a higher probability to keep growing with GDP), kudos to them. I do suspect that those who piled a large portion into REITs (and depend on its predictability/high yield) are not going to end up as per intention.

Thanks. Actually it is much more complicated that "capital structure", there is nothing inherently wrong with the leverage or type of loans by most REITS. It is a combination of the REIT operating model and financial engineering quirks that render the difference in the concept of distribution and dividends. It's a pretty technical subject which I hope to touch on in more detail when I have some time.

I think for the purposes of discussion it is acceptable in most cases to classify a distribution as a dividend since in the context of most REITs, the distribution is paid out almost entirely from accounting profits. Otherwise, if we delve deeper into the technicalities, you can also argue that REITs are not exactly "shares" or "stocks" either but "trust units". 

On the IPO, I must admit I have not read the prospectus in detail as a headline dividend yield of 5.19% from mostly Aussie REITs (>59%) hardly sounds exciting to me. Because of the composition, I would not compare this yield directly with what you can get from Singapore REITs as the Australian interest rates are higher than Singapore's (10yr Aussie govt bond is at 2.30% vs Singapore's at 1.90% according to Bloomberg) translating into a lower risk premium for this ETF. The relatively high expense ratio is also a no no for me. 

What I am curious though is how the higher earnings yield of 9.69% [1/(P/E)] translates into a dividend yield of just 5.19% (granted an Aussie withholding tax of 15%) given that most REITs are supposed to pay out 90% or more of their accounting profits.

Edit: Sorry for the multiple quotes

[mobo]

The term "Dividend Leaders" is a misnomer considering this ETF is 100% REIT driven. Distributions are not dividends and in current low interest rate environment, it is simply not possible for a broad based index focused in AU, HK and SG to generate 5.19% "dividend yield".

Asset managers have deliberately conflated the two distinctive financial terms in their self-promotion. This is a potential major hazard down the road as I understand a lot of retired senior citizens are living on such "dividends" under the wrong impression that they are safe and sustainable.

Care to explain to me why distributions are not the same as dividends? 
Why do you say that these dividends are not safe & sustainable?

To answer your question, one would need to look into each and every REIT on their "capital structure" (gearing, type of loans etc). A dividend is defined as a distribution out of excess earned profits, rather than out of capital. So even though some of the leasehold type of Trusts disguise their "return of capital" as profits, it should still be considered dividends, based on the definition.

"Safe" is a really relative term. So unless we have a reference point for "safe", then there is no point to start a discussion here, since all of us have different notions for it.

I reckon a lot of retired senior citizens were once regular salary-receiving employees. This explains why they would continue to seek "regular dividends" from their investments, when it should be very clear to them, that along the way as they aged, they should have observed that the really rich people are the ones who focus capital gains over dividend payouts. For those retired senior citizens whom have held the big caps/blue chips (low dividend yield when they purchased it donkey years ago, but has a higher probability to keep growing with GDP), kudos to them. I do suspect that those who piled a large portion into REITs (and depend on its predictability/high yield) are not going to end up as per intention.

Thanks. Actually it is much more complicated that "capital structure", there is nothing inherently wrong with the leverage or type of loans by most REITS. It is a combination of the REIT operating model and financial engineering quirks that render the difference in the concept of distribution and dividends. It's a pretty technical subject which I hope to touch on in more detail when I have some time.

I think for the purposes of discussion it is acceptable in most cases to classify a distribution as a dividend since in the context of most REITs, the distribution is paid out almost entirely from accounting profits. Otherwise, if we delve deeper into the technicalities, you can also argue that REITs are not exactly "shares" or "stocks" either but "trust units". 

On the IPO, I must admit I have not read the prospectus in detail as a headline dividend yield of 5.19% from mostly Aussie REITs (>59%) hardly sounds exciting to me. Because of the composition, I would not compare this yield directly with what you can get from Singapore REITs as the Australian interest rates are higher than Singapore's (10yr Aussie govt bond is at 2.30% vs Singapore's at 1.90% according to Bloomberg) translating into a lower risk premium for this ETF. The relatively high expense ratio is also a no no for me. 

What I am curious though is how the higher earnings yield of 9.69% [1/(P/E)] translates into a dividend yield of just 5.19% (granted an Aussie withholding tax of 15%) given that most REITs are supposed to pay out 90% or more of their accounting profits.

Edit: Sorry for the multiple quotes

Unfortunately that is not the case. It is a fundamental difference that has implications on portfolio planning that needs to be distinguished, it isn't just semantics or technicalities although REIT managers try very hard to give the general market that impression.

[MINX]

The term "Dividend Leaders" is a misnomer considering this ETF is 100% REIT driven. Distributions are not dividends and in current low interest rate environment, it is simply not possible for a broad based index focused in AU, HK and SG to generate 5.19% "dividend yield".

Asset managers have deliberately conflated the two distinctive financial terms in their self-promotion. This is a potential major hazard down the road as I understand a lot of retired senior citizens are living on such "dividends" under the wrong impression that they are safe and sustainable.

Care to explain to me why distributions are not the same as dividends? 
Why do you say that these dividends are not safe & sustainable?

To answer your question, one would need to look into each and every REIT on their "capital structure" (gearing, type of loans etc). A dividend is defined as a distribution out of excess earned profits, rather than out of capital. So even though some of the leasehold type of Trusts disguise their "return of capital" as profits, it should still be considered dividends, based on the definition.

"Safe" is a really relative term. So unless we have a reference point for "safe", then there is no point to start a discussion here, since all of us have different notions for it.

I reckon a lot of retired senior citizens were once regular salary-receiving employees. This explains why they would continue to seek "regular dividends" from their investments, when it should be very clear to them, that along the way as they aged, they should have observed that the really rich people are the ones who focus capital gains over dividend payouts. For those retired senior citizens whom have held the big caps/blue chips (low dividend yield when they purchased it donkey years ago, but has a higher probability to keep growing with GDP), kudos to them. I do suspect that those who piled a large portion into REITs (and depend on its predictability/high yield) are not going to end up as per intention.

Thanks for your explanation. 
For those retirees who are dependent on a big Reit portfolio for their retirement, what would you suggest? Keep a  cash warchest by the bedside for right issues?

[shadow_walker]

I think for the purposes of discussion it is acceptable in most cases to classify a distribution as a dividend since in the context of most REITs, the distribution is paid out almost entirely from accounting profits. Otherwise, if we delve deeper into the technicalities, you can also argue that REITs are not exactly "shares" or "stocks" either but "trust units". 

On the IPO, I must admit I have not read the prospectus in detail as a headline dividend yield of 5.19% from mostly Aussie REITs (>59%) hardly sounds exciting to me. Because of the composition, I would not compare this yield directly with what you can get from Singapore REITs as the Australian interest rates are higher than Singapore's (10yr Aussie govt bond is at 2.30% vs Singapore's at 1.90% according to Bloomberg) translating into a lower risk premium for this ETF. The relatively high expense ratio is also a no no for me. 

What I am curious though is how the higher earnings yield of 9.69% [1/(P/E)] translates into a dividend yield of just 5.19% (granted an Aussie withholding tax of 15%) given that most REITs are supposed to pay out 90% or more of their accounting profits.

Edit: Sorry for the multiple quotes

The reasons why the headline dividend yield is lower than average dividend yield of Australia and S-REITs are due to the multiple fees or tax paid:
1) Expense ratio of 0.65%
2) 17% taxation on S-REIT's distribution(only individual local investor are exempted from tax for the distribution received)
3) 10-15% withholding tax on the Australia REIT's distribution

Add in the brokerage fees, etfs are not that low cost in Singapore. Local investors are much better off building their own REITs portfolio.

[Debronic]

Unfortunately that is not the case. It is a fundamental difference that has implications on portfolio planning that needs to be distinguished, it isn't just semantics or technicalities although REIT managers try very hard to give the general market that impression.

Care to illustrate your point further?

You seem to suggest that REIT managers are deliberately trying to mislead the public investors by using dividends and distributions interchangeably. Well then, to be fair, you should know that they are not alone as MAS and other government websites do it too. Just to give you a couple out of the many examples:
http://www.mas.gov.sg/news-and-publicati...lines.aspx
http://www.moneysense.gov.sg/Understandi...rusts.aspx

Like I said, REITs are technically (similar but) not equities in companies and hence they cannot be exactly the same. In fact, MAS classifies a REIT as a Collective Investment Scheme (CIS), which puts it in the same category as other unit trusts. Personally, I do not see a problem using dividends to describe distributions in most cases as they are all from profits. Some pay out from capital distribution, which I would normally discount when calculating sustainable distribution yield.

[Retired@52]

Unfortunately that is not the case. It is a fundamental difference that has implications on portfolio planning that needs to be distinguished, it isn't just semantics or technicalities although REIT managers try very hard to give the general market that impression.

Care to illustrate your point further?

You seem to suggest that REIT managers are deliberately trying to mislead the public investors by using dividends and distributions interchangeably. Well then, to be fair, you should know that they are not alone as MAS and other government websites do it too. Just to give you a couple out of the many examples:
http://www.mas.gov.sg/news-and-publicati...lines.aspx
http://www.moneysense.gov.sg/Understandi...rusts.aspx

Like I said, REITs are technically (similar but) not equities in companies and hence they cannot be exactly the same. In fact, MAS classifies a REIT as a Collective Investment Scheme (CIS), which puts it in the same category as other unit trusts. Personally, I do not see a problems using dividends to describe distributions in most cases as they are all from profits. Some pay out from capital distribution, which I would normally discount when calculating sustainable distribution yield.

Dear Valued Buddies,

Don’t argue over the names or terms used.

As long as they put money into our pockets, I’m okay with any names they used.

Remember: “A rose by any other name would smell as sweet”.

I’ve no quarrels with the followings:

CPF gives me Interests every year.

Insurance Company gives Cash Values/Bonuses every year.

Stocks & Shares give me Dividends every year.

REITs give me Distributions every year.

My Children give me Allowances every month.

Of all the above, the largest amount I’ve received is from REITs. 
 
When I was working, I invested in a unit of property.

In property, I needed to pay: Instalments, Property Tax, Monthly Maintenance, Income Tax, Repairs, Agent Fees when renewing tenancy.

When I retired, I sold off the property & invested in REITs to collect Distributions.

[BlueKelah]

Unfortunately that is not the case. It is a fundamental difference that has implications on portfolio planning that needs to be distinguished, it isn't just semantics or technicalities although REIT managers try very hard to give the general market that impression.

Care to illustrate your point further?

You seem to suggest that REIT managers are deliberately trying to mislead the public investors by using dividends and distributions interchangeably. Well then, to be fair, you should know that they are not alone as MAS and other government websites do it too. Just to give you a couple out of the many examples:
http://www.mas.gov.sg/news-and-publicati...lines.aspx
http://www.moneysense.gov.sg/Understandi...rusts.aspx

Like I said, REITs are technically (similar but) not equities in companies and hence they cannot be exactly the same. In fact, MAS classifies a REIT as a Collective Investment Scheme (CIS), which puts it in the same category as other unit trusts. Personally, I do not see a problems using dividends to describe distributions in most cases as they are all from profits. Some pay out from capital distribution, which I would normally discount when calculating sustainable distribution yield.

Dear Valued Buddies,

Don’t argue over the names or terms used.

As long as they put money into our pockets, I’m okay with any names they used.

Remember: “A rose by any other name would smell as sweet”.

I’ve no quarrels with the followings:

CPF gives me Interests every year.

Insurance Company gives Cash Values/Bonuses every year.

Stocks & Shares give me Dividends every year.

REITs give me Distributions every year.

My Children give me Allowances every month.

Of all the above, the largest amount I’ve received is from REITs. 
 
When I was working, I invested in a unit of property.

In property, I needed to pay: Instalments, Property Tax, Monthly Maintenance, Income Tax, Repairs, Agent Fees when renewing tenancy.

When I retired, I sold off the property & invested in REITs to collect Distributions.

yup in my books, REITs are just repackaged mortgages run by a manager. Ease of investment into real estate sector and no need to worry about the troublesome stuff that comes with owning an investment property directly, though you will probably not be able to leverage as much as an investment property.

Just have to pick them up when they are cheap such as during market corrections and the $$ will just keep rolling in.

[cyclone]

For reference.

Issue price for the Phillip SGX APAC Dividend Leaders REIT ETF : US$ 0.933 per unit.

[tanjm]

In my opinion, the Singapore REITS system is broken.

1) Many REITS here pay only the interest and rollover the principal
2) Many properties here are leaseholds
From 1) and 2), when leases of these properties expire, what are REITS going to do? No property but got principal to repay

IMO, it will be a matter of time before banks will ask REITS to switch to an amoritsing loan structure instead of bullet loan. This will affect dividends cashflow

3) Due to capitalization rate valuation being used, many valuers are using very low cap rates relative to historical numbers. Once normalised cap rates numbers are used again. The result: asset prices fall, debt amount remains the same; leading to higher leverage ratio. In such situation, MAS will have to either relax the rule, or REITS raise rights which dilutes current shareholders. It is unlikely revenue will increase enough to offset fall in asset prices

Therefore, while it seems nice that REITS are yielding 4 to 6% in the current low interest environment. One has to seriously think about the future implications.

Not sure why you'd say REITS are broken since since SGX REITS do not seem to be that different from other REIT markets. An investor in a REIT just has to be aware of its characteristics. Unless of course, you really mean that REITS are over-valued? (that's another argument).

No REIT market that I know of requires the REIT to match its loan cashflows to the underlying rental cashflow duration (aka amortizing loans). Some REIT markets allow even higher leverage than Singapore's does. Tax treatment varies, but Singapore's tax treatment is not bad no?

The only thing that might be different would be leasehold asset durations. But I have no evidence that foreign market REITS are any different (do you?). In any case, many of the SGX REITS own foreign assets.

See
www.epra.com/media/EPRA_REIT_2014_GLOBAL_1417773403962.pdf