Decent dividend: Industrial REITS offer highest yield for investors

What’s New

• The benchmark FSSTI opened 3.4% lower today following Wall Street’s worst sell-off since the global financial crisis. We revisit the REITs which offer a high-yielding defensive refuge to ride through the current market volatility.

Action

• Industrial logistics and suburban retail REITs most defensive. The relatively long leases of more than five years for the industrial REITs and the necessity spending in retail REITs exposed to the heartland malls lend them highly defensive characteristics.

• Our preferred picks for these segments are Cache Logistics Trust and Frasers Centrepoint Trust.

• Within the office sector, K-REIT is relatively more defensive due to its long weighted average lease term (WALE) of 7.2 years while Ascott Residence Trust’s high average length of stay of five months lends greater stability within the hospitality sector.

Essentials 

• Industrial REITs offer high yields and long leases. Industrial REITs offer investors the highest yields among the various mainstream yield instruments. The 7.5% dividend yield is significantly higher than the returns from fixed deposits, government bonds, telco shares or bank preference shares. Industrial REITs also offer a 100-200bp premium over yields from office and retail REITs.

• Industrial REITs also have some of the longest WALE among the REITs as tenants tend to occupy whole buildings and after having invested heavily into capital equipment and machinery, do not shift premises easily. This is supported by the long master leases signed by tenants.

• Among the industrial REITs, we like Cache (Cache SP/BUY/Target: S$1.25) and Ascendas REIT (AREIT SP/BUY/Target: S$2.45) for their long WALEs, while Cache also offers one of the highest yields at 8.5% in FY11.