This REIT Has An 11% Dividend Yield: Here’s What Investors Should Know About It

Sabana Shariah Compliant REIT (SGX: M1GU) is the world’s first real estate investment trust that has adopted the standard of Shari’ah compliance. Shari’ah is the moral code and religious law of the Islamic religion.

Having adopted the standard of Shari’ah compliance would mean that Sabana REIT can tap into the Islamic finance market. According to the World Bank, the Islamic finance industry was estimated to be roughly US$2 trillion in size in early 2015.

Sabana REIT currently has a portfolio of 21 industrial buildings that are all found in Singapore. Most of the properties are also located in close proximity to the principal industrial zones in the island, such as Penjuru and Tai Seng.

I have a habit of periodically looking at stocks that are near 52-week lows. Sabana REIT, at its current unit price of S$0.53, is just a whisker away from its 52-week low of S$0.51. Furthermore, the REIT has a trailing dividend yield (technically, REITs give out distributions, not dividends) of an eye-popping 11% thanks to its distribution of $0.0583 per unit in the last 12 months.

For perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund that mimics the fundamentals of the Straits Times Index (SGX: ^STI), has a yield of 3.2%.

Here are a few important things investors may want to know about Sabana REIT’s business fundamentals that are related to its distribution:

1. Second-quarter earnings announcement

In its latest quarterly earnings report (for the three months ended 30 June 2016), Sabana REIT reported a 10.9% year-on-year decline in gross revenue and a 31.1% decline in income available for distribution. The steeper decline in income available for distribution as compared to revenue is due to an increase in property expenses.

During the quarter, Sabana REIT also saw the fair value of its investment properties drop by S$50.8 million. This does not affect the REIT’s distributions as it is a non-cash charge, but it’s something worth keeping an eye on.

2. Multi-year decline in distribution per unit

Sabana REIT has a double-digit distribution yield. But, investors may want to note that the REIT’s distributions per unit on a quarterly basis have exhibited a multi-year trend of decline.

Source: Sabana REIT earnings presentation

For some perspective, Sabana REIT has a distribution per unit of 1.23 cents in the second-quarter of 2016; this is nearly half the 2.40 cents per unit seen in the second-quarter of 2013.

3. Occupancy rate

The occupancy rate for a REIT is an important metric to look at since it gauges the strength of the market demand for the REIT’s properties.

In the first-quarter of 2016, Sabana REIT’s overall portfolio occupancy level stood at 90%. This is very similar to the industry averages. But, the REIT’s overall portfolio occupancy had declined to 88.8% in the second-quarter of 2016.

Moreover, Sabana REIT’s occupancy rates are lower than some of the other Singapore-focused industrial REITs. For instance, Soilbuild Business Space REIT (SGX: SV3U) reported a portfolio occupancy of 92% in the second-quarter of 2016.

When faced with a stock or trust with a high dividend yield, it is important for investors to look beneath the hood. Not every stock or trust with a high yield is a good investment.

What I’ve shown here about Sabana REIT can serve as a useful starting point for investors to conduct further research, but it’s worth noting that they should not be seen as the final word on the REIT’s investing merits.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.