In addition to their attractive distribution yields, real estate investment trusts offer investors exposure to real estate assets, are typically less volatile than stocks, and have business returns that are generally easier to forecast than other types of companies. It is, hence, unsurprising that REITs have become one of the most popular investment vehicles in Singapore’s stock market.
With the Singapore REIT market undergoing a minor price correction earlier this year, REITs now offer investors even more value than before. With this in mind, here are two REITs I bought last month and why I did so.
1. First Real Estate Investment Trust (SGX: AW9U)
First REIT is a healthcare REIT that owns 16 properties in Indonesia, three in Singapore, and one in South Korea. Its properties are mostly healthcare-related, such as hospitals, nursing homes, and specialist centers.
Over the last five years, First REIT has managed to grow its distributions from 7.5 Singapore cents per unit to 8.6 Singapore cents. This translates to a respectable compound annual growth rate of 2.77%.
However, what really caught my eye is the sustainable nature of First REIT’s business. Firstly, the REIT’s properties in Indonesia are under the HGB (Hak Guna Bangunan) land title agreement. This type of land title is effectively freehold, as the land tenures can be renewed for just a small fee after the title expires.
Secondly, the properties in Indonesia are leased for 15 years with a built-in fixed-rental escalation term, and a profit-sharing component. The fixed component provides stable and consistently growing rental income, while the variable component – albeit only a small fraction of First REIT’s rental income – provides the REIT with upside from any growth in its tenants’ businesses. With the closest renewal coming only in 2021, and management fairly confident that the lease will be renewed for another 15 years, there is a very low risk that First REIT’s properties will be left untenanted in the years ahead.
Thirdly, the REIT has managed its finances very prudently. As of 31 March 2018, the REIT has a gearing ratio of 34.1%, which is well below the regulatory cap of 45%. This gives it debt headroom to make yield-accretive acquisitions in the future.
Finally, despite its capacity for growth and pristine track record, First REIT still trades at a very attractive price in my view. Currently, units of First REIT trade at S$1.35 each. This translates to a price-to-funds-from-operations of 13.1, a price-to-book ratio of 1.23, and an attractive distribution yield of 6.3%.
2. Frasers Logistics & Industrial Trust (SGX: BUOU)
The next trust I bought in the last month is Frasers Logistics & Industrial Trust. As you might have guessed, the trust focuses on investing purely in logistics and industrial facilities. It currently has a portfolio of 54 properties in Australia and has plans to acquire another 21 properties in Europe.
Unlike First REIT, Frasers Logistics & Industrial Trust does not have a very long track record to study as it was only listed as recently as 2016.
However, what is appealing about the trust to me is the fact that its property portfolio has numerous characteristics that bode well for its future, and that suggest that its properties are resilient to macro-economic challenges.
For one, the trust invests primarily in properties that sit on freehold land or have long leasehold tenures. As such, these properties are more likely to increase in value over time, and the REIT does not have further capital requirements to extend its land leases until many years later.
The REIT also has built-in rental escalations on its leases, which provide stable increases in rental income each year. In addition, as of 31 March 2018, the REIT has a portfolio occupancy rate of 99.4%, and a long weighted average lease expiry of 6.75 years. There is therefore, stable and visible rental income in the next few years for the REIT. Furthermore, the US-based ecommerce giant, Amazon.com, recently announced its entry into Australia. This will likely further increase the need for warehouse space – Frasers Logistics Trust, with its 54 properties in the country, is well-placed to meet the growing demand.
In addition, Frasers Logistics and Industrial Trust also has one of the lowest gearing ratios among REITs in Singapore – it has a gearing of just 30.5% at the end of 2018’s first quarter. This gives it around A$531 million of debt headroom to fund further acquisitions to boost its DPU in the future.
At its current price of S$1.10 per unit, the REIT has a reasonable price-to-book ratio of 1.21 and a distribution yield of 6.21%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of First Real Estate Investment Trust, and shares of Amazon.com. Motley Fool Singapore contributor Jeremy Chia owns units in First Real Estate Investment Trust and Frasers Logistics & Industrial Trust.