Real estate investment trusts, or REITs, are popular investment vehicles in Singapore because of their high dividend yields. But it’s dangerous to invest in a REIT based on a high dividend yield alone, as the yield tells us nothing about the REIT’s ability to maintain or grow its dividend.
There are financial traits we can look at to gauge how safe a REIT’s dividend is. One such key trait is the REIT’s track record in growing its distribution per unit, or DPU, over time. (For our purposes, the terms distribution and dividend mean the same thing.)
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Fortunately for us in Singapore, the local stock market contains a number of REITs with a history of growing their dividends in each of the last five years. An example will be First Real Estate Investment Trust (SGX: AW9U), which currently has a portfolio of 20 properties that are mostly healthcare-related facilities. 16 of these properties are in Indonesia, three are in Singapore, and the remaining one is in South Korea. The REIT’s sponsors are PT Lippo Karawaci Tbk and OUE Lippo Healthcare Limited (SGX: 5WA); both entities have given the rights of first refusal (ROFR) to First REIT for their healthcare-related properties.
The chart below shows First REIT’s quarterly distribution per unit from 2013 to 2018. In that period, First REIT’s DPU grew in each year, and increased from 7.45 cents to 8.60 cents.
Source: First REIT earnings presentation
The REIT’s DPU growth has been driven by higher gross revenue and net property income, illustrated in the following chart:
Source:First REIT earnings presentation
Growth’s still present in First REIT’s latest results. In 2018’s fourth-quarter, First REIT’s gross revenue increased by 2.7% year on year, leading to net property income inching up by 1.9%. First REIT credited the growth to contributions from the acquisition of Siloam Hospitals Yogyakarta in 2017’s fourth-quarter, as well as higher rental income from existing properties. DPU came in flat at 2.15 cents.
As of 31 December 2018, First REIT’s gearing ratio stood at 35.0%, which is healthy, since it is considerably lower than the regulatory gearing ceiling of 45%. The REIT ended the year with a committed occupancy rate of 100%.
As icing on the cake, First REIT’s share price of S$0.995 gives it a high distribution yield of 8.6%.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for First Real Estate Investment Trust.