Dasin Retail Trust (SGX: CEDU) is offering an attractive distribution yield of 7.7% at its current price of S$0.88 per unit. This makes it one of the highest-yielding REITs in the market. Though the yield may look attractive to income-hungry investors, there is one impending event that could cause its distribution per unit (DPU), and hence price, to fall drastically.
The impending drop
Currently, two major unitholders of Dasin Retail Trust have agreed to waive a portion of their entitlement to distributions for the benefit of other unitholders. The amount waived is subsequently distributed to other unitholders, propping up the DPU.
However, according to the agreement, the number of units that the two shareholders will not be entitled to distribution will slowly decline until FY2021, when the agreement expires. The chart below shows the number of units not entitled to distribution, starting from FY2017 and ending in FY2022.
Source: Dasin Retail Trust 2019Q1 Earnings Presentation
As the number of units not entitled to distribution during this period declines, the DPU paid out to unitholders will definitely fall as a result.
Take the first quarter of 2019 for instance. For that quarter, the trust will pay out 1.7 Singapore cents per unit. However, if we strip the distribution waiver away, that leaves unitholders with a DPU of just 0.95 Singapore cents.
Valuation still too high
Despite the fact that the distribution waiver is artificially supporting DPU, Dasin Retail Trust, in my opinion, still sports an unrealistically high valuation.
The distribution waiver will only last for another two years and the number of units not entitled to distribution is decreasing each year. At its current price, the trust has an annualised distribution yield of 7.7% when we include the distribution waiver. To put that in perspective, that translates to an annualised distribution yield of a measly 4.3% once we remove the distribution waiver.
Investors need to consider that the number of units entitled to the waiver will fall dramatically in 2020 and 2021, and the waiver will eventually cease to exist after that. This will most certainly lead to steep declines in DPU over the next three years.
The Foolish bottom line
Even though Dasin Retail Trusts sports a 7.7% yield now, the decline in the number of units not entitled to distributions and the eventual expiry of the distribution waiver is likely going to result in sharp falls in DPU.
With numerous other REITs providing more sustainable DPU over a much longer time frame, I prefer putting my money where I know it can compound at a more sustainable rate over the long-term.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Jeremy Chia does not own units of Dasin Retail Trust.