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REIT: How does a REIT Grow? Why a Low Dividend Yield REIT Grows Better and More Attractive than High Dividend Yield REIT

When you are prospecting which real estate investment trust (REIT) to purchase, would you usually choose a REIT with a higher, more acceptable dividend yield compared to one that pays out lower?

At the same time, you would want me to recommend you a REIT that has “better prospects”, and “more sustainable” that is “for the long term.”

Some readers tell me they wouldn’t purchase this REIT because the Price to Book ratio is high. That is usually the metric to say asset-based investments like REITs are expensive.

Today, I will show you that high dividend-yielding REITs may not always trump those low dividend-yielding REITs. There are benefits when the price to book is high for a REIT.

We also answer the question:

How does a typical REIT grow over time?

And if you want better prospects and sustainable growth, you have to look at REITs differently.

Different Kinds of REITs, Different Profiles, Different Returns, Different Risks

If you are looking to buy trust with a manager or manage a group of properties, you have many choices in Singapore. There are currently 37-38 REITs listed on the SGX.

On my Dividend Stock Tracker, you can find the majority of them.

You will tend to zoom in on the higher-yielding ones, such as Cache Logistics Trust (Dividend Yield 9.2%), Soilbuild Business Space (Dividend Yield 9.3%) or IREIT Global (Dividend Yield 8.4%).

You will tend to shun the lower dividend-yielding REITs, such as Parkway Life REIT (Dividend Yield 4.7%), Keppel DC  REIT (Dividend yield 5.5%), and Fortune REIT (Dividend Yield 5%).

If you look at these three low-yielding REITs’ Price to Book Ratio (PTB), they are respectively 1.4 times book value,  1.3 times book value, and 0.7 times book value.

If higher dividend yield and lower price-to-book ratio are the basic valuation techniques of what is expensive and what is cheap, isn’t the straightforward decision to purchase the high-yielding REIT?

Not necessary.

The first thing you need to be aware of is that dividend yield and price to book are just two areas to evaluate. Due to the nature and profile of what is purchased in the REIT, there is a reason some REITs have a higher dividend yield compared to others.

Due to the differences in the demand and land lease of property left, Retail REITs tend to have lower dividend yields than Commercial and then Industrial REITs.

Your Return is the Total Return in a Year or Over time, Not just a Dividend Return

What makes up your return when you invest in a REIT is not just the dividends but also the capital growth.

Suppose you are an investor on the sidelines looking at a particular REIT.

What is going through your head when you are looking at the returns should be:

Total Return in a given year =  Current Dividend Yield + Compounded Capital Growth Per Year

The dividend yield explains itself. It is derived from the current dividend cash flow distribution of the REIT divided by the current unit price of the REIT.

Compounded Capital Growth can be viewed as the growth of the REIT’s dividend and the share price.

Theoretically, suppose the current dividend yield of CapitaLand Integrated Commercial Trust (Dividend yield 4%) is4%.

For the next year, if you look at CapitaLand Integrated Commercial Trust again, its dividend per unit should go up from growth, and the dividend yield should be 4%.

For the dividend to stay around 4%, the share price has to go up.

For the next year as well.

The opposite is also true when the dividend per share has negative growth. The dividend yield will remain at 4% to compensate shareholders, but the dividends per unit are smaller. In this case, the share price has to go down.

Your return as a shareholder investor is the dividend yield + capital growth

The Capital Grow or Contract by:

  1. Organic – Rental Revision Upwards or Downwards depending on inflation, demand and supply
  2. Organic – Filling up vacancies or having more vacancies
  3. In-Organic – Purchase of new Property Assets
  4. In-Organic – Doing redevelopment or Asset Enhancements on Existing Property

For the benefit of today’s discussion, let us focus on the impact of #3 – In-Organic – Purchase of new Property Assets

How REITs Secure the Capital to Grow

Unlike normal stocks listed on the market, REITs are unique in that they can pay out their dividend cash flow distributions from their free cash flow.

They can pay higher than net income as they do not have to pay taxes.

This is because they pay out at least 90% of their cash flow as dividends.

This is not cast iron and is subject to change.

As the REITs pay out almost all their cash flow as dividends, they retain very little cash flow to carry out growth initiatives, such as purchasing new property assets.

To grow, REITs need to Tap the capital markets.

You need to understand the balance sheet of a typical REIT.

Assets = Equity + Liabilities

In other words, the managers of the REIT can fund the new purchases or other capital requirements either by adding to the equity or liabilities.

The following table summarizes the common forms the trust manager can seek to finance their new acquisitions:

Different Kinds of Capital Raising for Real Estate Investment Trusts (REIT)
Different kinds of Capital Raising that you need to be familiar with

1.  Debts to Finance First

#6 is usually the go-to option first. This is when the cost of debt is cheaper.

However, a REIT cannot be over-leveraged and usually, when they hit 42% debt to asset, they would have to look for other sources of financing or wait for the asset value to go up so that the debt to asset ratio will go down.

When the debt to assets goes down, the trust can then fund more acquisitions by debts.

2. Normal Equity to Finance Next

Managers will then turn to #1, #2 and #3.

Placements (#2) are preferred because existing shareholders are generally not receptive to having to cough out money from their pocket in Rights Issues to fund the acquisitions. Placements tend to be done when the share price is performing well. When the share price is performing well, the cost of equity is cheaper.

The manager might also do a non-renounceable rights issue (#3) when the share price is performing well, and the acquisition is accretive. When the share price is performing well, the cost of equity is cheaper.

If the share price is not doing well, but due to circumstances, or the manager wants to force an acquisition, they will call you to put in more money in a renounceable rights issue (#1). This is usually to offer you to put in more equity at a more heavily discounted share price (compared to non-renounceable). When they need to discount so much, the cost of equity is comparatively more expensive.

This is usually done when the manager thinks it will not be well received.

3. Hybrid Instruments Next

When both debts and traditional equities are difficult, or the acquisition is big, then the manager might turn to CPPU, perpetual securities, convertible bonds, and perpetual bonds.

These are a hybrid between equities and debt; some do not add risk to the REIT’s balance sheet (but reduce cash flow to pay the shareholders). At the same time, convertible bonds or CPPU can be lower in interest expense but subject you the shareholder to future dilution.

4. A combination of all the previous

In some complicated situations, or when the deals are too big, a combination of all the previous three can be carried out.

When Ascendas REIT wanted to purchase an Australian portfolio worth $1 billion or about 20% of their balance sheet AND some Singapore assets purchase, they turned to a combination of:

  1. $600 mil in debt
  2. Perpetual Securities
  3. $200 mil in a 3 for 80 rights issue 5 cents below the last traded price
  4. $200 mil placement to institutional investors at $2.29 (last traded price $2.37)

The result is that they got new assets, and the net debt to assets of Ascendas REIT remains below 40%

OUE Commercial wanted to acquire One Raffles Place, so they turned to:

  1. $550 mil in CPPU (1% interest rate)
  2. $218 mil in a renounceable rights issue at $0.555 (9 for 20 shares)
  3. $333 mil in debt

Shrewd managers, who are well connected to good resources, will be in a better position to structure deals to acquire assets.  However, resources are tight during bad times because most lenders (both finance companies and shareholders) are more apprehensive about providing capital. Then acquisitions will be challenging.

Related: More materials explaining placements and rights issues can be found here, here, here and here.

Why High Yield REITs are Constrained by Limited Capital Sources and Accretive Property Asset Prospects

When a REIT like IREIT Global, have a dividend yield of 9% and a debt-to-asset of 42%, they do not have much debt headroom to finance a new acquisition when the debt-to-asset is so close to 45%.

To make it worse, if the asset value plunges, they would need to remedy that as their debt-to-asset shoots up.

For a new acquisition to be accretive to you, if you are an existing shareholder, the new property assets’ net property income yield now or somewhere in the future has to be greater than the current dividend yield enjoyed by you, the existing shareholder, before this proposed acquisition.

In the case of IREIT Global, when they cannot tap by debt, they can go the route of 50% debt, 50% rights issue or placement or a combination of that with preference issues.

If not, IREIT global will have to fund the acquisition by 100% rights issue.

When your current dividend yield is 9%, the trust manager needs to find a property asset that yields greater than 9%.

That is a high hurdle.

It is certainly easier in the case of Parkway Life REIT, whose dividend yield is 4.7%.

Parkway Life could have an easier time finding an accretive 15-year lease nursing facility that has an net property income yield of 6%.

The difference between IREIT Global and Parkway Life, other than a European Centric Commercial REIT and a Singapore and Japan Healthcare REIT, is that the market did not recognise the attractiveness of the trust and compressed its yield, while the other did.

A Low Yielding REIT and Dividend Growth Case Study – Frasers Centrepoint Trust

When Frasers Centrepoint Trust (FCT) IPO in Sep 2006, the share price was $1.03. Ten years later, today, it is $2.14.

The share price capital growth is 7.58% per year.

If we talk about total return, FCT has rewarded shareholders well. If you have held it during IPO, where they projected a dividend yield of 5.68%.

Your dividend based on cost today is an 11.3% yield.

If you are a new shareholder of FCT, the prevailing dividend yield is 5.5%.

FCT’s share price has compressed.

This has benefited the trust manager and the shareholders in that there was not a single rights issue carried out.

Much of the acquisitions’ financing was done by placements and debt. It certainly helps that institutional investors find the projects attractive.

Related: Some past research on FCT

How a Low Yielding REIT Grow its Dividend Per Share, Equity and Share Price in 3 Years

How do we explain this yield compression and acquisition growth in numbers?

Perhaps I can show you by way of an example.

Over three years, this REIT will acquire three properties.

We have the following REIT that has the following characteristics:

  1. It got a dividend yield of 5%
  2. debt to asset ratio of 45%
  3. price to book ratio of 1 time

It decides to propose the purchase of a property for $50 mil by way of placing out shares to new institutional investors.

This new property comes with a net property income yield of 6%, which is accretive over the current dividend yield you, the existing shareholder, enjoy of 5%.

At the bottom section, notice the following:

  1. The asset base has increased, and so is the equity but total debt stayed the same
  2. The  number of shares has risen due to the placement
  3. The debt to asset is reduced to 42.86% due to a bigger equity base
  4. The new dividend yield is 5.06%

Second Year

In the second year, the share price of the REIT rose by 10%.

No more is the share price $0.55, but now it is $0.605. As the share price rose, the prevalent dividend yield is now 4.84% instead of 5.1%.

The trust manager decides to propose a new acquisition, this time it’s bigger at $60 mil.

Again, they decided to do a placement and put out shares to new shareholders at a 5% discount over the last traded price of $0.575.

This new property comes with a net property income yield of 5%, which is slightly accretive over the current dividend yield you, the existing shareholder, enjoy of 4.84%.

Notice that as the dividend yield is compressed from 5.1% to 4.84%, the hurdle for new acquisition purchases is reduced, and more accretive properties come into the picture.

At the bottom section, notice the following:

  1. The asset base has increased, and so is the equity but total debt stayed the same
  2. The  number of shares has risen due to the placement
  3. The debt to assets is reduced to 40.54% due to a bigger equity base
  4. The new dividend yield is 4.83%
  5. The price to book is now 1.1 times

Third Year

In the third year, the share price of the REIT goes up another 10% due to its good quality assets and growing equity base. The trust manager decides to gobble up something bigger at $140 mil.

As the debt to the asset has come down, the trust manager has the option of funding the property asset with an $80 mil placement and $60 mil from debt. The placement is done at a 5% discount.

This new property comes with a net property income yield of 4.5%, which is accretive over the current dividend yield you, the existing shareholder, enjoy of 4.38%.

Notice that as the dividend yield is compressed from 4.83% to 4.38%, the hurdle for new acquisition purchase is reduced, and more accretive properties come into the picture.

At the bottom section, notice the following:

  1. The asset base has increased, and so is the equity but total debt stayed the same
  2. The  number of shares has risen due to the placement
  3. The debt to assets stays almost the same at 40.81%
  4. The new dividend yield is 4.68%
  5. The price to book is now 1.2 times

What we can observe

When we line up the three years together, we may notice some things:

  1. The total equity grew from $550 to $739, 81% in total of 10% per year. When the equity base grows, the share price will be dragged upwards as the asset base becomes more valuable.
  2. The dividend on cost for you, the shareholder invested at the start of year 1, grew from 5% (0.0275/0.55) to 5.54% (0.0297/0.55) over three years, purely by acquisitions.
  3. This simulation’s price-to-book ratio remains high at 1.2 times, making acquisition easier.
  4. You, the shareholder, did not have to put out a single cent, and your DPU and book value per share grew.
  5. While there is dilution, what matters is that your dividend per unit goes up during this period.
  6. The net property income yield of the prospective acquisitions goes down, and yet it is still accretive.

Older Shareholders Benefit While New Shareholders Wonders About the Future

It doesn’t take a genius to figure out that if you pick a good REIT that is well supported in the market, you stand to make good benefits.

If you are not an existing shareholder but an investor on the sidelines evaluating this REIT, you will be hoping the management keeps this mandate going.

For good REITs, if you sit in them long enough, you will see the benefits compound.

A High Yielding REIT Grows – The First REIT Case Study

Does that mean high-yielding REITs are inferior?

Not necessary. Some of these REITs are just neglected, and the market has failed to accord them with the right valuations.

One good example is First REIT (Dividend yield 6.5%).

First REIT is a healthcare REIT with the majority of the assets in Indonesia.

For a long time, its share price hovered around $0.60 to $0.80. The prevailing dividend yield is 8%.

While 8% seems like a high hurdle to make an acquisition, in Indonesia, where the risk free rate is much higher, First REIT can still find hospitals then that provides a net property income yield of 9%.

They did a rights issue then, and after that, the market began to recognise their long ten years average lease, and the share price rose to a high of $1.40 but eventually settled at the current $1.30.

At a current prevailing dividend yield of 6.5%, it is much more conducive for them to find accretive targets, particularly from their parents.

You would hope that your high-yielding REIT falls into this picture.

The manager needs to be Well Supported in Various Capital Sources

Another important factor that needs to be said is that to fund large acquisitions or to fund acquisitions consistently, will require the trust manager to have various funding sources.

The smaller REIT managers lose out when it comes to this aspect.

Trust managers with sponsor backing tend to do this better.

Some complex deals require not just a placement or debt, but a combination of placement, rights issue, debt and preference issues.

The latest Ascendas REIT (Dividend Yield 6.3%) purchases Australian assets by placement, preferential offering to existing shareholders, perpetual securities and debt. I highly doubt all REITs can do something like this easily.

It will take some time for the dividend yield of a low yielder to catch up to a high yielder.

While most of the article talks about the virtues of a low-yielding REIT, we do require to wait sometime before the dividend yield of the low yielder tops that of a high yielder.

In this illustration above, we simulate three different REITs with the same value of $1000. The first REIT is a high-yielding REIT with a dividend yield of 9%, but its growth in dividend per share is 1%. The second REIT is a balance REIT that yields 7%, and its growth in dividend per share is 3%. The last REIT is one where dividend yield is a low 4.5%, but its growth rate is 10%.

The second REIT will take 13 years for the dividend to overtake the first REIT. The third REIT will take seven years.

However, the crux is that it will take some time, whether you want to wait.

One thing of note is that the capital growth of the dividends and the share price might differ.

This means that while dividend capital growth might be 10%, the share price growth might be at a much faster pace, making the low yielder more attractive.

Does this mean we can buy an Expensive, high-price-to-book, low-yielding REIT?

Not so fast.

This article illustrates how a REIT grows and why a lower-yielding REIT can be attractive.

However, total return is just one selection criterion.

While an expensive REIT can grow, the music has to stop at a certain point.

You can load your REIT with numerous assets, but:

  1. If the forward economy is not good, with few jobs and industries, you will have a problem filling up the occupancy of many assets. Failure to do this will result in a fall in dividend per unit and a negative effect on share price
  2. If the trust manager is not good at managing their tenants, vacancies, and optimising property assets, the REIT will eventually degenerate.

In summary, what is expensive can remain expensive for longer than you anticipate, but the tide or economy will turn such that this growth will have to pause or, in the worse case, reverse.

You have to respect value always.

How the Manager tackles #1 and #2 to mitigate the impact during down cycles is also a quality test.

Accretive Acquisitions – Why New Asset NPI Yield versus Dividend Yield?

I need to elaborate a bit here in short.

In general, we evaluate whether an asset should be acquired or not based on its return versus the cost of capital.

Return > Cost of Capital

Cost of Capital could be the various financing methods.

If your cost of capital makes up majority of debts, your cost of capital could be between 2%-4%. If it is preference shares it could be 4.5-5.5%.

For rights issues or placements, the cost of capital, is the opportunity cost of making this acquisitions, or the cost the company, say First REIT need to pay its equity holders. In this case it is the dividend yield of 6.5%.

Hope this helps.


I hope you better understand how a REIT could grow via acquisitions.

When I started, I always thought that a REIT’s purpose was to distribute the dividend cash flow. It looks like I am not the only one.

George Soros, in his book The Alchemy of Finance, pages 61 to 63, wrote about this misinterpretation of common investors:



Superficially, mortgage trusts seem to resemble mutual funds designed to provide high current yields. But the analogy is misleading. The true attraction of mortgage trusts lies in their ability to generate capital gains for their shareholders by selling additional shares at a premium over book value. If a trust with a book value of $10 and a 12% return on equity doubles its equity by selling additional shares at $20, the book value jumps to $13.33 and per share earnings go from $1.20 to $1.60.

Investors are willing to pay a premium because of the high yield and the expectation of per-share earnings growth. The higher the premium, the easier it is for the trust to fulfill this expectation. The process is a self-reinforcing one. Once it gets under way, the trust can show a steady growth in per-share earnings despite the fact that it distributes practically all its earnings as dividends. Investors who participate in the process early enough can enjoy the compound benefits of a high return on equity, a rising book value, and a rising premium over book value.

You can read more over here.

I shared more about stuff on REITs like this in my section on REIT where I go deep into the weeds of investing in REIT. It is FREE and available:
REIT Training Center

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Anthony Tran

Wednesday 26th of December 2018

Hi Kyith,

In your article "", when you talk about "Return > Cost of Capital" under Accretive Acquisitions – Why New Asset NPI Yield versus Dividend Yield?, what is the "definition" of the return? is it including the rental income, and capital growth?

And, when pepople talk about new acqusitons has to be accretive, they are talking about the "property income yield", NOT the DPU?


Saturday 29th of December 2018

Hi Anthony, the return here is referring to the consistent yield that you will get for this acquisition versus the cost of capital. In stocks the owner have 2 sources of capital: debt or raise more equity. the cost of equity is the dividend yield because, if you are an existing shareholder, and the current dividend yield is 7%, and this property will not add to your dividend yield, then why should you approve them to purchase this asset? if the dividend yield after this is less than 7%, why would you approve this transaction and see your dividend get reduced by this acquisition.

Hence a lot of times, the cost of capital for a REIT is either the interest expense of the debt or the cost the manager needs to pay existing shareholders (in this case the dividend income).

There might be a bit of confusion here as well, because the manager can finance the property by a mixture of debt and equity. so that is 2 different cost of capital.

at the end of the day, the resultant dividend yield for an EXISTING OWNER in the REIT should be higher, for it to be deemed accretive.

there are rights issue where the dividend per unit ends up lower, but because the existing owner subscribes to discounted rights shares, they eventually end up with a higher dividend yield.

Hope this helps


Wednesday 30th of May 2018

Hi Kyith,

Great article, I have learned a lot reading this. Have always wonder how REIT can grow when they distribute almost 100% of their income.

Can I ask will there be any difference if REIT do placement issue new shares at premium or discount? Also, do you think is a better comparison using REIT overall property yield % to compare against the new acquisition? If not, how do you determine the Dividend Yield for comparison when the share price is constantly moving?

Thank you in advance!!


Saturday 2nd of June 2018

Hi Jonathan you asked some tough questions and I will try to provide my perspective.

>If not, how do you determine the Dividend Yield for comparison when the share price is constantly moving?

This is difficult, even in a period of rights issue, when the share price is trading. My answer to this is: Look for attractiveness of good valuation going forward. This means that you are looking at a good total return for the price that you pay. For example. If you have a stock that has a dividend yield of 5% and would grow at 5% for the next 3 years conservatively, that is 10%. pretty neat. Contrast this to a stock that is having a 8% dividend yield but the challenge will make the growth to be -4% for the next 3 years. That is 4%.

we are trying to buy at a price that shows value, and that is you are paying a lesser price for the intrinsic value. And these REITs are valued based on their cash flow in the future. So you need to assess the fundamentals of their cash flows going forwards, with some qualitative analysis and the management in the past.

Conservatively if you can get something that yields well at 7% and growth rate is 0%, versus a 10 year government bond rate of 2.7%, i think that is pretty good. if the growth rate is -2%, then that may not be attractive. You can buy a 7% + 0% but conservatively hope that it grows at 2%, so that is your margin of safety.

PRices and earnings will be volatile. You have to routinely evaluate. If the property cycle is not right, you might wish to rebalance.

> Can I ask will there be any difference if REIT do placement issue new shares at premium or discount?

Placements usually need a little 4-7% discount to the current share price, just to attract the institutional investors. it is seldom at a premium. The REIT manager sometimes manipulate the market so that the price goes up, or is stable for the period. I hope i am answering to the right question on what is premium or discount.

> Also, do you think is a better comparison using REIT overall property yield % to compare against the new acquisition?

When you compare the dividend yield to the NPI yield of the new property, you are comparing the cost of equity currently faced by you a stakeholder, versus the new property. It is to measure whether it adds value to the portfolio.

However, if we are asking whether the new property is value, versus the existing portfolio of property, then yes you can do a npi yield comparison. what you derive is the answer to is this property more attractively value yield wise versus my current portfolio. note that for current portfolio you need to use the market cap rate, not the yield on cost. of course this is one of the permutations. quality of tenant and structure can determine whether a lower npi yield might be worth more.

hope this helps.


Wednesday 14th of March 2018

Hi Kyith! I'm from Malaysia. Your articles are very informative. Now I have a clearer view on how to pick a good mREIT. Thank you so much for your effort.


Thursday 15th of March 2018

HI Lee, thanks a lot. To be fair I heard from my friend Rusmin of Fifth person who does a fair bit of Malaysian REIT that you guys have less financial engineering which is good.


Friday 3rd of February 2017

Kyith Great article with very good analysis, helps novice people like me to understand and navigate the dividend income landscape via REITs

Thanks a lot.


Saturday 4th of February 2017

hi kumar, hope it helps. There are many under my REITs Training Center as well under Resources.


Tuesday 2nd of August 2016

a well thought article, good read. btw, how to save/store such articles online for future reference?


Thursday 4th of August 2016

Hi Bruce, download this cloud app call Pocket. They have extensions on Safari, Chrome and Firefox and android that allows you to save articles and read them offline.

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