The Motley Fool

Should you buy this REIT for its 5% yield?

There are very few shares on the ASX that aren’t in danger of imminent disruption whilst also offering investors good income and long-term growth.

I think commercial property could offer investors what they are looking for on the ASX in the form of real estate investment trusts (REITs).

Folkestone Education Trust (ASX: FET) could be one of the best REITs to get the combination of income and growth.

It’s a REIT which leases its properties to childcare operators. It has around 400 operating properties which are leased to some of the biggest childcare providers like Goodstart Early Learning and G8 Education Ltd (ASX: GEM).

The childcare industry as a whole has a decent outlook because of the rising number of births each year as well as the current high rate of net immigration.

The rising property prices have also helped fuel the growth of the value of Folkestone’s property portfolio.

The childcare industry has managed to grow its participation rate by 7% over the last five years to 35.5%. An improving economy, the likelihood of both parents working and the government rebates are all factors that have played a part in the participation growth.

Folkestone has grown its net tangible assets per unit from $1.18 at June 2011 to $2.51 by June 2017. Over that same period the annual distribution per unit has grown from $0.085 to $0.142. It has achieved impressive growth.

Management expect that the FY18 distribution per unit will grow by 6%. This means it’s currently trading with a projected forward distribution yield of 5.3%.

Folkestone has a fairly sustainable gearing ratio of only 27.7%, whilst it has a target ratio of 30% to 40%. This gives room for more acquisitions or improvements.

Foolish takeaway

Folkestone is currently trading at 19x FY17’s distributable earnings per unit with a trailing distribution yield of 5%. For income investors, I think this is a fairly attractive price to pay for a growing business.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.