What A-REIT payout ratios can mean for capital expenditure
An A-REIT is a listed property trust that is professionally managed either by an external party or by internal staff within a related corporate structure which is known as a stapled entity.
A payout ratio is the proportion of earnings paid out as distributions to unit holders in a trust or dividends to share holders of a company.
Among the benefits of investing in an A-REIT is the higher payout ratio compared with broader listed equities. A-REITs have a pay-out ratio mostly ranging between 75% and 100%. This contrasts to the broader equities payout ratio of around 50%, although with significant variation.
Trusts have limited discretion about the share of earnings paid to unit holders. There are no prescribed minimum distribution rules. Taxation of Trusts means that close to 100% of earnings are distributed otherwise tax at the highest marginal rate is payable. Some income may be retained in order to meet capital expenditure requirements.
A company, or corporate component of an A-REIT, can pay as much or as little of its earnings as it elects. This explains why the externally managed A-REITs will normally have a higher pay-out ratio than a stapled A-REIT.
The A-REIT sector currently has an overall average earnings pay-out ratio of 81%. The average payout ratio of the externally managed A-REITs is 92%. The average for the internally managed stapled A-REITs is 72%.
By 2007, the average A-REIT payout ratio had escalated to 101%. Paying out more than income earned is an unsustainable proposition and relied on recognising and paying out growth in the fund’s capital value. This was achieved by increasing gearing. This increased gearing was subsequently exposed as capital values fell during the financial crisis.
Payout ratios were reduced in 2010 and 2011 to preserve cash and to assist in rebuilding balance sheets at a time when A-REIT performance was poor. Going against this trend is Westfield Retail Trust, which is increasing its payout ratio from 90% to 100% from this year, leaving no room for any capital expenditure from earnings. Capital expenditure is essential to maintain the appeal of retail assets in particular. This increase in the payout ratio has not met with broad support.
Mark Wist is senior asset consultant at Atchison Consultants.
