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Forget Rate Hike; 3 REITs For Investors With Different Risk Appetite
Corporate Digest | 30 November 2015
Related stocks:
ACV
By: Tan Jia Hui
Articles (82) Profile

In the words of US Federal Reserve chairwoman Janet Yellen, a rate hike in December – the first since 2006 – is a “live possibility”.

As we edge closer to a possible rate liftoff, the Singapore interbank offered rate (SIBOR) – common bench market for local floating rate mortgages – has actually been slowly creeping up since the start of the year. In fact, the three-month SIBOR rate had more than doubled from 0.46 percent in January to 1.07 percent in November.

Looking across the equities market, real estate investment trusts (REITs), which own or finance income-producing real estate assets through equity and debt seems a clear candidate that will be impacted by the impending rate move.

The most direct impact of a rate hike would be an increase in the REIT’s cost of borrowing. With debt playing an integral function for REITs, a REIT’s expansion plans may be limited when funds become more expensive. Secondly, as refinancing costs rise, distribution on REIT’s may also come under pressure.

That said, does it mean that investors should start dumping and shun away from REITs?

The short answer is no.

Singapore-REITs have actually been sold down in the past months over fears of a rate hike; we see value emerging for some of our favourite REITs.

The Defensive Investor
Name (Type): CapitaLand Mall Trust (Retail)

CapitaLand Mall Trust (CMT) is the first REIT listed in Singapore and the largest S-REIT by market capitalisation. The trust’s portfolio consists of 16 shopping malls (excludes Rivervale Mall, includes stakes in Raffles City Singapore and Westgate), located across the island.

While some might question how a retail REIT can be classified as defensive play, a closer examination shows that more than half of CMT’s assets are located in the sub-urban areas. These sub-urban malls cater more towards non-discretionary spending (think groceries, food and medication), purchases that people have to make be it good times or bad times.

Additionally, the remaining portfolio is mostly located strategically in the city area and is close or connected to a train station, and footfall is incredibly high at most of these malls.

CMT’s holding in CapitaLand Retail China Trust is also a bonus in my view, as it gives investors exposure to China’s economy and the Chinese yuan. The general trend is that the yuan has been appreciating against the Singapore dollar in the past three years and while China’s growth is expected to slow, I still believe the potential the lies beneath this gigantic economy.

Lastly, with a robust track record (since 2002) as well as a strong sponsor, CapitaLand, CMT is a REIT that would make a good addition to one’s investments.

5-year PB Range /Current PB: 1.01 – 1.43 times / 1.01 times (Based on 27 November close price of $1.88)
Current Yield (last 12 months (LTM)): 5.8 percent

Runner-up: First REIT (heath care) is a clear defensive play, with a portfolio of hospitals located in Indonesia. Weighted average lease to expiry for health care REITs are much longer than other types of REITs. Foreign currency risk mitigated as rent collected in terms of Singapore dollar. However, there is some slight overhang on the stock with recent news that it could be shifted to Indonesia and hence it did not make our top choice.

The Risk-neutral
Name (Type): CapitaLand Commercial Trust (Commercial)

The commercial REIT sector has been facing many headwinds in recent times. A slowing Singapore economy, pending rate hike and looming supply glut (estimated 4.5 million square feet (sqft) of office space coming on board in 2016) are just some of the issues office S-REITs have to confront.

That said, after going through some corrections, CapitaLand Commercial Trust (CCT) is starting to look attractive again as an investment.

CCT’s portfolio consists of 10 centrally located commercial properties (inclusive of stakes in Raffles City Singapore and CapitaGreen) with a relatively diversified tenant base, as compared to some office REITs with an even heavier exposure to the banking & finance sector (cyclical).

Source: Company

While CCT’s portfolio committed occupancy slipped 3.1 percentage points year-on-year to 96.4 percent in 3Q15, the figure is above the market occupancy rate of 95.8 percent (compiled by CBRE).

With a gearing level of 30.1 percent (as of 30 September), CCT has one of the lowest gearing amongst S-REITs. The REIT has debt headroom of approximately $1.3 billion before hitting 40 percent gearing, providing opportunities for inorganic growth. The REIT’s manager has also taken a prudent approach in managing its debt, with 83 percent of gross borrowing on fixed rate.

For investors who are willing to take on slightly more risk, CCT’s current valuations provide an interesting entry opportunity, though it should be noted that headwinds are unlikely to clear soon and upside catalyst seems limited.

5-year PB Range/Current PB: 0.62 – 1.1 times/ 0.75 times (Based on 27 November close price of $1.30)
Current Yield (LTM): 6.6 percent

The Risk-loving
Name (Type): Frasers Hospitality Trust (Hospitality)

Frasers Hospitality Trust (FHT), which went public in 2014 can be considered a relatively new member in the S-REITs family. The trust’s portfolio consists of 13 properties – 7 hotels and 6 serviced residences – in 5 countries (Australia, Japan, Malaysia, Singapore, UK).

The hospitality sector is a rather volatile business given the exposure to country specific-risks, seasonal factors as well as the performance of the general global economy. However, we note that FHT’s assets have a minimum rent under the master lease structure, providing downside protection. Additionally, upside potential comes in the form of a variable rent component, which varies accordingly to the performance of the individual property.

In comparison to local centric hospitality REITs like OUE Hospitality Trust and Far East Hospitality Trust, FHT’s portfolio provides geographical diversification, which is a plus point in our opinion.

FHT has a visible acquisition pipeline which provides inorganic growth opportunities; given that it has right-of-first refusal to the hospitality assets of its sponsor, Frasers Centrepoint, as well as its strategic partner TCC Group.

Looking ahead, a recovery in the local hospitality segment and the completion of the asset enhancement initiatives at InterContinental Singapore (February 2016) could be potential boosts to FHT.

Nonetheless, there are still visible risks that could impact the trust’s results. These include negative foreign exchange movements (multi-currency earnings, but distribution paid in Singapore dollar) and a slowdown in travel demand due to terrorism threats and slowdown in economy.

With valuations near all-time low and a yield of 8.6 percent, FHT might make a good addition for investors with a higher risk appetite.

5-year PB Range/Current PB: 0.83 – 1.1 times/ 0.85 times (Based on 27 November close price of $0.73)
Current Yield (LTM): 8.6 percent (distribution from 14 July 2014 to 30 September 2015 adjusted to 12-month period)

Knee-jerk Reaction From Rate Hike
Although valuations for most REITs are starting to look attractive, investors should avoid throwing in all their money in one go. One should still expect some sort of knee-jerk reaction in the market when the rate hike is confirmed. Thus, when that happens, it provides an opportunity for investors to enter at an even lower price or average down on their investment.

Meanwhile, investors should be reminded that a rate hike does not mean doomsday for the REITs market. In particular, a gradual pace of interest rate increase is expected. While it is good to remain cautious, investors should not be overly worried at this moment as we would get a clearer picture on the markets once the Fed makes it move.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

CapitaLand Mall Trust  2.120 -0.01 -0.47%   
Business: Co owns and invests in quality income-producing assets which are used, or predominantly used, for retail purposes primarily in Singapore.

Insight: Apr-18, 1Q18 gross revenue increased by 1.8% mainl... Read More
First REIT  1.320 -0.010 -0.75%   
Business: Co is a healthcare real estate investment trust. [FY17 Geographical] Indonesia (95.7%), Singapore (3.5%), Korea (0.8%).

Insight: Apr-18, 1Q18, Co reported a 0.5% rise in distribut... Read More
CapitaLand Commercial Trust  1.760 +0.020 +1.15%   
Business: Co is a real estate investment trust.

Insight: Apr-18, 1Q18 gross revenue increased 7.7% to $96.4... Read More
Frasers Hospitality Trust  0.695 +0.005 +0.72%   
Business: A stapled group comprising Frasers Hospitality REIT and Frasers Hospitality Business Trust.

Insight: Apr-18, 2Q18 gross revenue and net property income... Read More


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