The Motley Fool

Should You Invest in This REIT with a 8.3% Yield?

With a trailing distribution yield of 8.3%, Cache Logistics Trust (SGX: K2LU) is the third highest yielding REIT in Singapore. But as long-term investors, we should not look just at the distribution yield of a REIT. Whether the distributions can be sustained or even grow over time is more crucial than merely the current yield.

With that in mind, here are some details from its latest earnings presentation that will give us a better idea on the long-term sustainability of its distributions.

Favourable lease expiry profile

One of the easiest ways to predict how sustainable a REIT’s rental income will be in the coming years is to look at its lease expiry profile. Tenant contracts should preferably be long and have a staggered lease expiry.

Cache Logistics Trust has a lease expiry profile that fits both criteria. As of 31 March 2018, the trust had a weighted average lease expiry (WALE) by gross rental income of 3.3 years. Moreover, only 6.7% of leases by gross rental income is due in 2018, and more than 50% of leases are committed till 2020 and beyond.

Recent acquisition to fuel distribution growth

In the first quarter of 2018, Cache completed the much-anticipated purchase of a nine-property portfolio in Australia, increasing its total portfolio valuation by 15.6% to S$1.4 billion. As the acquisition was funded by a combination of debt and perpetual securities, it will most likely be yield-accretive and increase the trust’s distribution per unit.

Furthermore, the properties have an annual built-in rental escalation of between 2 to 3.5%, providing visible organic income growth in the future. The full effect of the distribution growth from this significant acquisition will be felt in the second quarter of 2018 and onwards.

High gearing and low interest cover

However, at the same time, the acquisition of the nine-property portfolio did come at a cost to the REIT.

First, it had to increase its borrowings to fund the acquisition. This puts its gearing ratio at 38.5%, which is one of the highest ratios among REITs in Singapore. It is also fairly close to the 45% regulatory limit, which will prevent the REIT from making further debt-funded acquisitions in the future.

On top of that, the REIT issued an additional S$100 million in perpetual securities, which it has to pay interest on. This has increased its financing cost considerably. Consequently, its interest cover is now just 3.45 times. At this rate, it will be hard for Cache Logistics Trust to take on more debt or issue any more perpetual securities in the future, without overstretching its balance sheet.

The Foolish bottom line

With its recent acquisition, fairly long WALE and annual built-in rental escalations, Cache Logistics Trust is likely to be able to grow its distributions in the future.

However, it is also important to note that the trust now has one of the highest gearing ratios among REITs here and a low interest coverage ratio. Interest rate fluctuations or lower rental income could hurt the trust. Furthermore, its stretched balance sheet will prohibit the REIT from making any debt-funded acquisitions for inorganic growth in the future.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.