2 REITs to buy for steady retirement income

2 REITs to buy for steady retirement income
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During stormy weather, it’s natural to run and look for cover.

And right now, the world is facing an economic storm of epic proportions, in the form of the Covid-19 pandemic.

A lot of our old assumptions need to be re-examined as business models and supply chains are altered beyond recognition.

Some may even need to be discarded.

It’s during times like these that we search for a calm oasis that can help us to weather tough times.

REITs are one such asset class.

By owning a portfolio of physical real estate, REITs can maintain their value even as other industries face plunging demand.

Besides, by owning REITs, you can also enjoy a steady, consistent stream of dividend income.

That said, Covid-19 has been detrimental to the business models of certain REITs, especially those in the hospitality and retail sectors.

As human habits are permanently altered due to social distancing, work-from-home and lockdowns, we also need to re-examine which business models remain resilient in this new normal.

When it comes to REITs, the industrial and healthcare sub-segments are generally faring better.

Here are two REITs that you can consider for steady, growing retirement income.

1. Parkway Life REIT 

Parkway Life REIT is one of Asia’s largest healthcare REITs by size.

The REIT owns a portfolio of 53 properties with a portfolio size of approximately $1.96 billion as of March 31, 2020.

It owns three private hospitals in Singapore – Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital, as well as 49 assets located in Japan.

For the first half of 2020, Parkway Life REIT’s gross revenue rose 5.1 per cent year on year to $60.1 million.

Net property income increased by 4.9 per cent year on year while distributable income inched up 1.9 per cent year on year to $40.4 million.

Distribution per unit (DPU) rose 1.9 per cent year on year as well, to $0.0668 from $0.0655 a year ago.

The REIT’s annualised distribution yield stands at 3.6 per cent at the last traded share price of $3.68.

DPU rose even though the REIT retained a total of $1.7 million in the first half of 2020 for tenant relief measures.

Its shares have performed well, up around 9 per cent year to date against the Straits Times Index’s  decline of around 20 per cent.

Looking forward, the REIT has no debt refinancing needs till June 2021, and its cost of debt remains very low at just 0.60 per cent.

Interest coverage is healthy at 15.8 times, while gearing stands at 38.3 per cent, way below the statutory limit of 50 per cent as mandated by the Monetary Authority of Singapore.

Moving forward, the minimum guaranteed rent for the Singapore hospitals is set to increase by 1.17 per cent as the leases are pegged to the consumer price index (CPI) plus 1 per cent.

The Japan properties have an “up only” rent review provision whereby rental rates either remain constant or increase, but cannot decrease.

Covid-19 has, thus far, had limited impact on the REIT’s properties as all are still in operation.

Parkway Life REIT intends to continue seeking growth through proactive asset management, as well as seeking out opportunities for asset acquisitions in other regional markets.

2. Keppel DC REIT 

Keppel DC REIT is a pure-play data centre REIT with a portfolio comprising 18 data centres as of June 30, 2020.

The portfolio has a net lettable area of around 1.9 million square feet and spans 11 cities in eight countries.

For the first half of 2020, gross revenue jumped by 29.8 per cent year on year to $123.9 million, mainly due to acquisitions of two data centres and the addition of Kelsterbach data centre in May 2020.

Net property income soared 32.1 per cent year on year as property expenses increased by just 8.1 per cent year on year.

Distributable income rose 38 per cent year on year to $75 million and DPU increased by 13.6 per cent year on year to $0.04375.

The annualised dividend yield for Keppel DC REIT stands at around 3per cent.

Shares of the REIT have soared by 42.3 per cent year to date due to the sector’s resilience.

Data centres, being essential services, have been allowed to operate uninterrupted during the pandemic.

The REIT has around 12 per cent of its loans due for refinancing in 2020 and 2021 and is paying a low cost of debt of 1.7 per cent per annum.

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Interest cover remains healthy at 12.8 times.

Work has commenced on converting additional space at one of the REIT’s data centres into a data hall, with expected completion in the first half of 2021.

The outlook is bright for the sector as the pandemic has accelerated the shift from physical to digital, significantly pushing up demand for data usage.

Global mobile data traffic is expected to increase by 31 per cent annually from 2019 to 2025, and enterprise spending in cloud infrastructure is expected to grow at 22 per cent annually over the next five years.

With share prices battered to multi-year lows, many attractive investment opportunities have emerged. 

This article was first published in The Smart Investor. Disclaimer: Royston Yang owns shares in Keppel DC REIT.

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