3 High Yield SG Reits That Investors Should be Cautious About Part 1
The following Industrial Reits are currently trading at relatively high yields:
$ESR-REIT(J91U.SI) @7.8% yield
$SoilbuildBizReit(SV3U.SI) @8.7% yield
$Cache Log Trust(K2LU.SI) @8.0% yield
As I have previously shared before investors must not only look at the yield as yields are calculated based on past DPUs. We need to look deep into each Reit to determine if the DPUs are sustainable or if any upcoming action by the Reit management is detrimental to the shareholders.
We will look into ESR first. I have written about ESR’s management past actions that were unfavourable to shareholders: the VIT acquisition link here https://www.investingnote.com/posts/989148 and the recent EFR link here https://www.investingnote.com/posts/1483778
You might say that the DPU has gone up slightly after the VIT merger. Actually that’s due to financial engineering. If you look at the latest 2Q2019 results, there was distribution from past disposal gains of 3.78 million and 2.1 million in management fees paid in units ($0 before merger). Without these support the DPU would have dropped from 1.004 to 0.819 which is 14% lower than the 2Q2017 DPU before the acquisition.
Previously I mentioned that two of the EFR purpose are good for shareholders, the AEIs and the acquisition. Upon closer look at the acquisition, the DPU accretion is only 0.4% despite taking on a high level of financing of 65% for the acquisition. If they were to take a more reasonable level of debt like 40%, the acquisition will be dilutive. You can say this is another form of financial engineering as the Reit must now raise more funds to reduce the higher gearing. Having said that the acquisition is good in the long term due to the long WALE of 10 years and the tenant PTC is certainly more reliable than Hyflux.
ESR have completed the private placement of $100 million @51.5 cents, which is the share price now. They are planning to raise another 50 million through a PO which will definitely be at a discount to today’s price which is why I urge investors who are interested to be cautious. ESR is waiting for tomorrow’s EGM before initiating the PO as they need the whitewash resolution in case there is less demand so they can pick up ESR shares at a discount without triggering a takeover. Do take note that tomorrow’s EGM will also have some resolutions that would be dilutive to shareholders in the long term. They are proposing to pay the development fees and the property management fee in units.
It is important not just to follow the buy calls of some analysts but to do your own research. I am not saying that ESR is a bad investment for the long term but I think it’s better to wait until closer to when the benefits of the AEI can be realised. Good luck to those vested.
I will share about SBR and CLT in the next part.