REIT interim dividends tipped for reinvestment
MORE than $2.3 billion will be extracted from the real estate investment trust sector in coming days from distribution payments to investors, with most tipped to plough the cash back into the market.
Most of the REITs pay their interim dividends, and some for the full year, by February 28. The breakdown is $1.96 billion in distributions this week, with a further $90 million due by mid-March.
According to the REIT reports, the average payout ratio is about 85 per cent of profits. In the dark days of the financial crisis it was closer to half, indicating that trust managers needed to retain cash to pay the bankers.
But in this lower interest rate climate, brokers are expecting up to 90 per cent of distribution payments to be reinvested in the listed REITs.
Maxim Asset Management managing director Winston Sammut said the reinvestment of dividends could provide further impetus for price rises in REIT share prices.
In the last two weeks, the REITs have reported strong results and have been upbeat in their outlook commentary. Most are predicting average earnings growth of about 5 per cent, comfortably above the rate of inflation. As a result of keeping a lid on costs over the past year, most of the REITS are also trading near or even above their net tangible asset levels, leading analysts to issue upgrades for the full year.
Andrew Smith, a director at Evergreen Capital, said a combination of the lower interest rates and the weight of money from super funds would see more cash reinvested into REITS this year.
"Investors seem less concerned about stockpiling cash this dividend season, as some did a year ago, so there are high expectations a majority of this dividend season will be reinvested," Mr Smith said.
"There has been a run in some of the larger trusts as investors seek higher yields, which has pushed the security prices up. We are seeing good value in the small-to-medium trusts, which have had positive earnings results."
John Kim, property analyst at CLSA, said 2013 had so far been about management changes and potential merger and acquisition targets.
"Since 2009, there have only been 11 REIT transactions. We expect the volume of transactions to pick up to take advantage of REITs' lower cost of capital, modest gearing (27 per cent), limited external growth from a local focus [mainly Australian mandates]," he said.
"Capital partners are also increasing their allocations into REITs against the backdrop of a low interest rate environment."