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If you like a REIT and the scrip comes at a discount, go for it!

In our last article, we discussed share buybacks. Now, with dividend season upon us, we see a growing number of REITs opting for scrip dividends. If cash needs to be internalized to 'save' a balance sheet, that is what should be done. Finding oneself overleveraged and having to make cuts is a painful decision, but the pain itself is no reason to avoid it. Few things make less sense than raising capital defensively while still paying out a cash dividend unless a REIT regime forces it upon management.

The core benefit of a scrip dividend is the option to retain cash within the REIT. This is especially relevant as investors have closely monitored balance sheets over the past few years. Critics often spark discussions by suggesting that a scrip dividend is the same as a capital raise, especially when REITs state they won't consider capital increases at a given share price but opt for a scrip instead. Critics argue it’s the same, which it clearly isn’t.

From a theoretical point of view, it may seem similar: a company issues shares which it then distributes to shareholders, often at a discount. However, the devil is in the details:

• It’s cheaper to issue a scrip than to raise capital, as there are limited legal documents and no distributing banks involved.
• In some cases, it could give investors a benefit over a standard dividend.
• Perhaps most importantly, compared to an Accelerated Book Build (ABB), it gives shareholders the option to dilute or not to dilute, whereas in ABBs, one is subject to allocation. This is a fair way of raising capital and caring for minority holders. Other minor benefits are that scrip dividends often come at a discount, and for smaller REITs, it enhances liquidity as shares in issue will increase.

Next, let’s address a highly debatable topic that deserves a sequel of its own. There are past examples where a REIT has paid a scrip dividend because it believes it has better uses for its cash. If that’s the case, one could argue whether a company should pay a dividend at all.

Investors often ask why the uptake of scrip seems low despite the benefits listed above. This might vary per REIT, but a few potential reasons could be large holders using yearly dividends to fund other needs, which might apply to smaller investors as well. Another reason to opt out is the inflexibility and risk of the price dropping below the issue price during volatile markets. The point is that by offering a scrip, you get a 'free option' to receive shares.

So, if you like a REIT and the scrip comes at a discount, go for it!

Credit – Van Lanschot Kempen Research