SINGAPORE (Mar 20): REITs have not been spared the global equity sell-off — the latest of which was inadvertently triggered by global central banks.
On March 15, the US Federal Reserve slashed the Fed Funds Rate (FFR) by a 100bps to zero and unleashed a US$700 billion ($993 billion) quantitative easing programme.
“To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over the coming months the Committee will increase its holdings of Treasury securities by at least US$500 billion and its holdings of agency mortgage-backed securities by at least US$200 billion,” the Federal Open Market Committee said in a statement.
To recap, the Fed had already cut its FFR by 50bps on March 3, in the first such emergency move since the GFC in 2008. In the latest round, the cut was part of a coordinated action in the UK, Japan, Eurozone, Canada and Switzerland.
In a normal situation, this sort of move would be panacea to investors in REITs because REITs are priced off risk-free rates such as yields on 10-year bonds and lower interest rates also imply lower cost of debt. However, the cuts had only served to upset nervous markets.
In its statement, the Fed said it had to ensure smooth functioning of agency mortgage-backed securities, hinting that all was not well in that sector. On March 14, The Financial Times reported that mortgage rates were rising in the US because mortgages tend to be securitised, causing difficulty to banks and brokers to sell them.
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A credit crunch is not good for REITs. For REITs to provide investors with juicy 5–7% yields, they have to take on significant amount of debt in their balance sheets. With most average debt to asset ratio ranging from 30–40%, refinancing could be problematic for REITs with weak sponsors.
Despite these headwinds, analysts remain optimistic that the REIT market will pick up in the coming weeks. “How REITs work is that when interest rates drop, people feel a shortage of income and so people, especially Asians, look for income in property,” says Richard Yeh, head of portfolio construction and risk management at wealth management firm, Syfe. “Since REITs offer a portfolio of properties, they provide a positive source of income during economic uncertainty,” he adds.
Thriving REIT sector
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To recap, Singapore’s REIT sector has performed well, since the first REIT — CapitaLand Mall Trust (CMT) — went public in 2002. “At that time, there was a lot of uncertainty and delays in the REIT going public, because people were unsure of how well a REIT will perform on the Singapore stock exchange,” says Yeh. “In fact, many thought Hong Kong will be a better place for REITs to list in,” he adds.
Since then, CMT has grown significantly, with its market cap jumping 16 times to $7.8 billion. This was achieved through the gradual accumulation of assets, funded by equity.
Since CMT’s IPO, Singapore has become a REIT listing hub of sorts. As at March 17, 42 have listed on SGX. This year alone, two of the largest IPOs are REITs — Elite Commercial REIT and United Hampshire US REIT — have listed here. A student portfolio belonging to Singapore Press Holdings is likely to also be listed this year. In contrast, Hong Kong — the world’s top initial public offering platform in 2019 — has just 11 listed REITs.
The difference, says Yeh, comes from favourable government policies and regulations here that entice even foreign-currency-denominated portfolio providers. “Hong Kong’s exchange is very laisse faire and centrally-driven whereas regulations in Singapore Exchange and resultant benefits doled out, created a demand for REIT IPOs here,” he points out.
In Singapore, REITs with local assets have no tax levied on them so long as they pay out 90% of distributable income. REIT distributions also carry no withholding tax for most REIT investors Moreover, the allure of 6.2% yields — one of the highest globally — has made the instrument more attractive to investors. And interestingly, the weighting of REITs in the STI has doubled over the last five years, in reflection of the heightened demand for them.
While the REIT sector has taken a hit from the global stock market downturn, Yeh advises investors not to be disheartened and to go for a “good group like Mapletree Holdings that is doing the right things”. Specifically, he says Mapletree Logistics Trust (MLT) looks promising given the growth of the e-commerce business and corresponding increase in demand for warehouse and logistics facilities. And with 143 properties across Singapore, Hong Kong, China, Australia, Malaysia, South Korea, Japan and Vietnam, Yeh says MLT is well diversified to reap these benefits regionally.
In its recent earnings for 3QFY19/20 ended Dec 31, 2019, MLT reported a DPU of 2.044 cents, some 2.1% higher than a year ago. The increase comes primarily from higher contributions from existing properties but was partially offset by the absence of contribution from five properties in Japan that were divested in 1QFY19/20. MLT’s overall growth was also moderated by the impact of the weaker Australian dollar, Korean won and Chinese renminbi.
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Amount distributable to unit holders was up 6.5% y-o-y to $76.6 million. This was due to the partial distribution of written back provision of capital gain tax for its properties at 134 Joo Seng Road and 20 Tampines Street 92 as well as gains from the divestments of 7 Tai Seng Drive, Mapletreelog Integrated (Shanghai) (HKSAR) and five properties in Japan.
Overall, MLT’s revenue inched up 0.3% to $121.1 million from $120.8 million in 3QFY18, following higher revenue contributions from existing acquisitions in Australia, South Korea and Vietnam completed in FY18/19 and 3Q19/20. Meanwhile property expenses for the quarter was down 22.8% to $12.6 million due to lower land rent following the adoption of a new accounting standard, as well as divestments completed in 1Q19/20.
This brought net property income to $108.6 million, 3.9% up from the $104.5 million logged in the previous year. Year-to date the counter is down 22.41% to close at $1.35 cents on March 18. At this level, the company has a market cap of $5.13 billion and has a P/B ratio of 1.15.
For now, MLT’s manager has articulated a cautious outlook as tenants hesitate to expand, it notes in a regulatory filing on Jan 20. While this may hold true amid a disruption to production and global supply chains amid Covid-19, Yeh considers this a temporary issue. “Globally production and exports is down now, but once the pandemic dies down the demand will certainly pick up,” he says. To him, the best thing about the group, is its “transparency which clearly tells [investors] what they are doing”. This says Yeh, allows investors tomake more informed decisions on when and how much to invest in the group.
Data centre in demand
Another REIT Yeh is eyeing is Keppel DC REIT (KDC REIT) because, he believes the group is set to grow amid a wave of digitalisation and resultant demand for data centres. “Everything is about data and digitalisation now. And this is even more so now, as telecommunication spikes following the segregations of congregations and at workplaces,” observes Yeh.
In FY2019 ended Dec 31, 2019, KDC REIT declared a DPU of 7.71 cents, a 5.3% jump from FY2018’s DPU of 7.32 cents. This follows a 17.8% increase in distributable income to $113.2 million, which comes on the back of new acquisitions such as Keppel DC Singapore and DC1 as well as full year contributions from Keppel DC Singapore 5 and maincubes Data Centre in Offenbach am Main, Germany.
Meanwhile, KDC REIT’s FY2019 revenue was up 11% y-o-y to $194.8 million, following higher revenue contributions from the new properties it acquired. During this time, property expenses fell 1.8% y-o-y to $17.5 million due to lower land rent following the adoption of a new accounting standard.
Overall, the REIT’s net property income came in at $177.3 million, up 12.4% y-o-y. Year-to date the counter was down 10.58% to close at $1.86 on March 18. At this level, the company has a market capitalisation of $3.04 billion and has a P/B of 1.63.
Diversification key to REIT investment
Amid the current global uncertainty, Yeh says it is hard to predict how S-REITs will perform in the coming months. However, he says come what may — investors need to have a good understanding of the instrument to reap the most from the sector.
“Unlike stocks, REITs do not have retained earnings and pay out close to 90% of their earnings. Instead, they use capital raisings by issuing more units or borrow when they want to buy property,” Yeh points out. Meanwhile, a company paying out more than its book value indicates its expectation of future growth, he adds. As such, he urges investors to monitor a company’s payout pattern to ascertain if a REIT presents a good investment opportunity.
Aside from this, Yeh believes the P/B ratio — net asset value — gives a good indication of a REIT’s valuation. He advises against buying REITs with a P/B ratio significantly exceeding 1 as it shows the REIT is not growing. Conversely, a P/E ratio below 1 is preferred as this shows the REIT is potentially undervalued.
The most important thing, says Yeh, is for investors to diversify their investments and buy multiple REITs across different sectors to avoid over exposure to the shocks from any one industry.
Market watchers should also be on the lookout to see if the coordinated global attempt to keep credit markets open, which is so vital for REITs, works as the global economy slips into recession.
