Right now, Cache Logistics Trust’s (SGX: K2LU) share price of S$0.73 gives it a high dividend yield of 8.0%, based on its trailing dividend of 5.811 Singapore cents per share. In fact, Cache Logistics Trust has one of the highest yields among the real estate investment trusts (REITs) in Singapore’s stock market. (Technically, a REIT has a unit price, not a share price, and it doles out a distribution, not a dividend – but let’s not split hairs here!)
But any investor who’s attracted to Cache Logistics Trust for its high dividend yield should be aware of the risks involved. Here are three reasons why I think the REIT’s dividend will likely fall in the future.
Cache Logistics Trust is managed by ARA Asset Management, a company that was previously listed in Singapore’s stock market. ARA manages over S$80 billion in real estate assets over its entire ecosystem, including 21 REITs.
As of 30 June 2019, Cache Logistics Trust’s portfolio consists of 27 properties, of which 10 are in Singapore and 17 in Australia. As its name suggests, the REIT’s properties are all logistics warehouses and they have a total valuation of S$1.3 billion.
Reason 1: History of lacklustre growth and falling DPU
Cache Logistics Trust was listed in April 2010. From 2011 to 2018, its income available for distribution had increased by a mere 2.7% per year and there were even declines in 2017 and 2018.
Source: Cache Logistics Trust annual reports
The picture with the REIT’s dividend per share, or distribution per unit (DPU), is even worse. There have been declines in every single year from 2014 to 2018. The falling DPU means that existing investors in the REIT have been getting a smaller share of its income over the years.
The trend has continued in the first half of 2019, as Cache Logistics Trust’s DPU of 2.834 cents for the period is 3.1% lower than a year ago.
Reason 2: Weak finances
When assessing a REIT, there are three important areas to look at that can give us clues on its financial health: The gearing ratio, the debt-maturity profile, and the interest coverage ratio.
The gearing ratio, which is the ratio of total debt to assets, tell us how much financial risk a REIT is taking on. Cache Logistics Trust’s gearing ratio of 37.9% as of 30 June 2019 is high. REITs in our local stock market are required by the Monetary Authority of Singapore to keep their gearing ratios below 45%.
If a REIT has a concentrated debt-maturity profile, where a lot of debt is maturing in a narrow span of time, it is facing high refinancing-risk. This is unfortunately the case with Cache Logistics Trust. As of 30 June 2019, 45% of the REIT’s total debt of S$506.8 million will come due in 2024. The good news is that the REIT has a number of years to fix the situation before it has to repay a huge chunk of its debt.
The interest coverage ratio tells us how much room for error a REIT has in using its income to service the interest payments on its borrowings – in general, the lower the ratio, the worse the situation is. Cache Logistics Trust has a low interest coverage ratio of just 3.5 in the second quarter of 2019. In comparison, Mapletree Logistics Trust (SGX: M44U), one of the largest logistics REITs in Singapore’s stock market, has an interest coverage ratio of 4.9 in the same quarter.
Reason 3: Poor incentive structure for the Manager
The table below shows Cache Logistics Trust’s total assets, net property income, income available for distribution, and DPU, from 2011 to 2018.
Source: Cache Logistics Trust annual reports
Notice anything odd in the table? There is respectable annual growth of 6.3% and 5.6% in Cache Logistics Trust’s total assets and net property income, respectively. But the REIT’s income available for distribution has grown at a much slower rate of just 2.7% per year while its DPU – what really matters for the REIT’s investors – has declined by 4.6% annually.
The discrepancy is easy to understand when we look at how the Manager of Cache Logistics Trust is paid. From 2011 to 2018, the REIT Manager’s fees each year are calculated as follows: (1) a base fee of 0.5% of the REIT’s property values; and (2) a performance fee of 1.5% of the net property income. Little wonder then that Cache Logistics Trust’s total assets and net property income have increased at a nice clip over time whereas other metrics – which happen to be important to the REIT’s investors – have fallen by the wayside. The incentives of Cache Logistics Trust’s Manager are not aligned with the REIT’s investors.
The Foolish bottom line
When investing in REITs, it’s easy to be tempted by a REIT’s high yield. But it’s important to look beneath the hood at a REIT’s financials and incentive-structure for its Manager – regardless of how high its dividend yield is – to determine whether its dividend is likelier to decline or grow over time.
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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 Mapletree Logistics Trust. The Motley Fool Singapore writer Chong Ser Jing owns shares in Mapletree Logistics Trust.