The Lion-Phillip S-REIT ETF (CLR) is one of the best-performing ETFs this year, excluding dividends. Including dividends, it is possibly the best-performing ETF. Since the start of the year, CLR is up 6.1% compared to the STI ETF which is up 1%. The top-performing ETF year-to-date is the SPDR S&P 500 ETF priced in US dollars. Including historic dividends of around 4%, CLR would be in pole position compared to other ETFs.
The Straits Times Index (STI), however, has outperformed the iEdge S-REIT Leader’s Index by a wide margin since its low in mid-March. For traders, the STI ETF may be the best way to trade the market. Since late March, some short covering could account for the continued rally in the STI, with the local banks leading the way.
The investment objective of CLR is to replicate the performance of the Morningstar Singapore REIT Yield Focus Index by investing in the underlying REITs within the Morningstar Index.
Although the largest weightage in the CLR ETF as at end-February is Frasers Centrepoint Trust, the fund also includes the likes of Suntec REIT, Manulife US REIT (MUST), and Cromwell European REIT (CEREIT). All three REITs — whatever their financial positions currently — do not have supportive sponsors. In the case of MUST, its sponsor appears reluctant to step up when the REIT requires financial support.
Problems associated with the S-REIT structure include too much debt. Interest expense is the highest expense for any REIT. The aggregate leverage component which comprises loan to value (LTV) disguises the impact of debt to equity (D/E).
For instance, MUST’s aggregate leverage is around 50%; but its D/E is more than 80%. If its property valuation falls again in 2023, its equity could be wiped out. This means that if all the properties are sold and cash returned to unitholders, the latter would receive hardly anything.
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Similarly, Suntec REIT’s D/E is around 79%, or 75% excluding its cash. However, Suntec REIT’s manager is realistic about what the REIT has to do — to divest properties as and when it can to lower aggregate leverage and D/E and raise the interest coverage ratio. Similarly, CEREIT’s aggregate leverage is around 40% depending on distributions, but a trifle less if cash is included. Its D/E is around 75%.
The case for looking at REITs is that risk-free rates are retreating. Yields on US 10-year treasuries ended at 3.35% as at April 4 compared to 4.08% in early March. But caution is advised.
According to OCBC Credit Research, investors have started pricing in the end of the US Federal Reserve’s tightening monetary policy, expecting rate cuts to occur as early as June this year.
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“Our OCBC rates strategist expects one final 25bps hike in the current tightening cycle, which will bring the Fed funds rate target range to 5.00%– 5.25%. Our expectation for now is for the easing cycle to start in early 2024, as inflation remains a hurdle. There is some downside risk to our expected Fed funds rate trajectory however, depending on the impact of the banking sector stresses on credit conditions — which will essentially do part of the tightening job,” OCBC Credit Research says.
Whatever the case, expectations of lower policy rates are positive for equity markets. Hence, the STI continues to rebound and since the mid-March turmoil, it is up by 7.5% from its mid-March intra-day low of 3,095.
Interestingly, a shareholder has written in a question for Oversea-Chinese Banking Corp’s (OCBC) AGM asking whether the management and board of OCBC would consider distributing all its Great Eastern Holdings (GEH) shares to OCBC shareholders to effect such a split. “This will unlock value in OCBC shares. This will also provide more liquidity to the trading of GEH shares for possible inclusion into MSCI & STI indices,” the shareholder says.
Minority shareholders of both OCBC and GEH think this is an interesting idea as it would boost the local market. The largest shareholder of GEH is OCBC with an almost 88% stake.
