Published April 6, 2009

Scrip dividends may cause dilution

Such schemes may lower Reits' FY11 DPU by 7-14%: UOB Kay Hian

By TEH SHI NING

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IMPLEMENTING a dividend reinvestment scheme (DRS) could potentially dilute the FY11 distribution per unit of real estate investment trusts (Reits) by 7 to 14 per cent, and their target prices by 2 to 12 per cent, a UOB Kay Hian study has found.

Reits such as Ascendas Reit and CCT are said to be considering the use of scrip dividends to meet distribution payouts and replenish capital.

Reits such as Ascendas Reit and CapitaCommercial Trust are said to be considering the use of scrip dividends to meet distribution payouts and replenish capital. Other non-Reit listed companies, OCBC and Keppel Land, have already done so. But so far, no Reit has implemented DRS.

Saizen Reit came close when it proposed to pay dividends for its second fiscal quarter in Reit units instead of cash, but abandoned the scrip-only plan after talks with the Singapore Exchange. It has since suspended dividend payments to conserve cash.

UOB Kay Hian analyst Jonathan Koh said: 'Reits will not be able to implement DRS as proposed by Saizen Reit as we believe it will affect Reits' tax transparency status.'

Current guidelines dictate that Reits distribute at least 90 per cent of distributable income to unitholders, in order to be exempt from paying corporate tax on the portion of income distributed.

It is likely that 'more Reits will be looking at DRS as proposed by First Ship Lease Trust (FSLT), which offers unitholders more choices', said Mr Koh.

FSLT's scheme allows unitholders to choose the proportion of dividends that they wish to take in units or cash, or continue to receive distributions fully in cash. Already approved by the exchange and shareholders, the scheme has not been implemented yet due to FSLT's current low unit price.

If unitholders choose cash, and UOB Kay Hian believes that most will 'as Reits' core investor base is predominantly insurance companies, income-oriented funds and high-net worth individuals', then, the 'actual quantum of dilution could be less than 5 per cent'.

The study analysed the sensitivity of DPU, target prices and gearing from implementing the DRS for a period of three years.

A DRS would cause less dilution in an overvalued Reit, which would issue fewer units in lieu of cash dividends, the report said. Similarly, Reits with lower EBIT margins and interest cover will see greater earnings improvement when DRS is implemented and gearing is reduced, and hence less dilution.

Gearing is likely to be significantly reduced if the scheme is implemented for three straight years, said UOB Kay Hian, noting that 'high-yield Reits, such as Ascendas Reit and Suntec Reit, are better able to reduce their borrowing but also suffer more dilution to their FY11 DPU and target prices'.

Among the four large-cap Reits, CapitaMall Trust, which is trading above its fair value, is expected to experience the least dilution and thus has more incentive to implement DRS, said the report.

UOB Kay Hian issued a sell recommendation on CapitaMall Trust at a target price of $1.17, and buy recommendations on Ascendas Reit, CapitaCommercial Trust and Suntec Reit at target prices of $1.59, $0.96 and $0.65 respectively.