Where can investors find stocks that have high dividend yields and carry relatively low risks? My suggestion would be real estate investment trusts, also known popularly as REITs.
Of course, not every REIT is a good investment. To start my search for REITs, I would screen for those with high yields – say 7% or above – and then study them in depth. Some areas I would look out for are the quality of a REIT’s management team, the financial health of the REIT, and the profile of the REIT’s property portfolio.
In here, I want to take a closer look at the two REITs in Singapore’s market that have the highest yields currently. They are Cache Logistics Trust (SGX: K2LU) and Soilbuild Business Space REIT (SGX: SV3U).
Source: SGX Stock Facts; Yahoo Finance
Cache Logistics Trust is a real estate investment trust that focuses on logistics properties. It currently has 19 logistics warehouse properties in its portfolio which are located in established logistics clusters in Singapore, Australia, and China.
The REIT announced its 2016 full year results in late January. Despite enjoying a 24% increase in gross revenue during the year, its distribution per unit (DPU) fell by 9.1% instead, due to the absence of a divestment gain and an increase in the unit count.
In its earnings release, Cache Logistics Trust commented that its market is already in an oversupply situation, yet there is even more warehouse supply coming in Singapore. The good thing is the REIT managed to increase its occupancy rate from 94.9% at end-2015 to 96.4% at end-2016.
The manager of Cache Logistics Trust is also looking to expand the REIT’s presence in Australia; right now, the REIT owns six freehold warehouses in the country.
Soilbuild Business Space REIT invests primarily in industrial and business parks properties in Singapore. Currently, it has 12 properties in its portfolio and they are all located in the Garden City. Some of Soilbuild Business Space REIT’s properties include Eightrium @ Changi Business Park, Tuas Connection, and Solaris.
In late January, the REIT released its 2016 full year results. During the year, Soilbuild Business Space REIT enjoyed a 2.3% increase in gross revenue and 4.1% growth in distributable income. But, due mainly to new units issued during a preferential offering in September 2016, the REIT’s distribution per unit had declined by 6.1%.
The occupancy rate for the REIT’s portfolio also showed sequential as well as year-on-year declines. Soilbuild Business Space REIT ended 2016 with an occupancy rate of 89.6%; it registered occupancy rates of 94.8% and 96.8% in the third quarter of 2016 and fourth quarter of 2015, respectively. The REIT highlighted the termination of a lease by Technics Offshore Engineering Pte Ltd as the main reason behind the occupancy rate it posted for the fourth quarter of 2016.
Commenting on the future, Soilbuild Business Space REIT’s manager said that the REIT’s “near-term” financial performance is expected to be “weaker than the preceding quarters” if a replacement for Technics Offshore Engineering can’t be found.
A Foolish conclusion
The two REITs mentioned above may have fat distribution yields. But it is worth noting that the yields alone tell us nothing about whether they can sustain their distributions going forward. Investors need to dig into the REIT’s fundamentals before coming to any investment decision.
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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.