When searching for quality and good fundamentals real estate investment trusts (REITs), one of the necessary financial ratios that investors always look out for is dividend yield. As REITs are highly regulated, they are obligated to distribute at least 90% of its distributable incomes to the shareholders. In our previous article, we have highlighted that while dividend yield is crucial, investors should not just chase for high dividend yield, but should also look for sustainability and potential growth of the dividend payout in the long run instead.
Today, we will go through three REITs that are paying more than 8.5% dividend yield based on the current stock prices. All three REITs are managing portfolios with foreign assets.
1. First REIT (SGX: AW9U)
First REIT, one of the two healthcare REITs listed in Singapore is offering a dividend yield of 10%. While healthcare REIT is in general the most defensive REIT, First REIT's DPU for the 1st half 2020 has dropped by more than 46%. This was mainly due to 2-month rental relief extended to all tenants to navigate through this Covid-19 period. Besides, its sponsor, PT Lippo Karawaci, lessee of most of its properties in Indonesia has initiated a discussion to restructure the rental scheme in view of the economic impact by the pandemic. The news has brought down its share price recently.
Besides, the recent drop in property income due to the pandemic has reduced its interest coverage ratio to 3.3 times, which is below our preference of 4 times. First REIT is trading at a "cheap" price as compared to its historical valuation. However, in view of the negative impact of the pandemic, potential extension of the rental relief package and the review of the rental agreement with its sponsor, its short to mid term DPU is likely to be impacted.
2. IREIT Global (SGX: UD1U)
IREIT Global manages a portfolio of commercial, retail and industrial assets in Europe. Based on its latest price, it is currently trading at 9.4% dividend yield. Its first half 2020 rersults dropped 2.7%, mainly due to the weak Euro exchange rate. The REIT has been maintaining strong fundamentals despite the Covid-19 pandemic. Its occupancy rate remained high at 95.7%. Net property income grew slightly to Euro 15.7m.
Management expects the US-China tensions and Covid-19 pandemic might impact the take-up of its offices. But the impact is likely to be minimal as majority of its leases are supported by blue-chip tenants.
At its current price, the REIT is trading at 9.4% yield and 0.84 price to book ratio, indicating a 16% discount on its net asset values.
3. Keppel Pacific Oak US REIT (SGX: CMOU)
Keppel Pacific Oak REIT was formerly known as Keppel-KBS US REIT, is a REIT that owns freehold commercial assets in the US. The REIT manages 13 freehold office buildings in its portfolio.
In its second quarter 2020 result, Keppel Pacific Oak REIT continues to deliver a healthy operational performance, with a 4% increase in DPU on an enlarged unit base of 13.8%. This was mainly due to the contributions from the new asset, One Twenty Five and positive rental reversion last year. Based on its latest price, the REIT is currently trading at about 8.7% dividend yield.
The management has projected a rental contraction of 2.5%-8.4% in the next 12 months across its key markets due to the Covid-19 pandemic. However, its suburban office buildings are expected to outperform and benefit from the shift away from central locations as businesses re-evaluate their spacing needs post Covid-19.
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