REITs - UOB Kay Hian 2015-10-05: Singapore Levelling The Playing Field: Stretching Balance Sheets To The Fullest

REITs - UOB Kay Hian 2015-10-05: Singapore Levelling The Playing Field: Stretching Balance Sheets To The Fullest REIT ASCOTT RESIDENCE TRUST A68U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI  MAPLETREE LOGISTICS TRUST M44U.SI 

REITs – Singapore Levelling The Playing Field: Stretching Balance Sheets To The Fullest 

  • Our comparison of S-REITs by stretching their balance sheets to the fullest suggests maximum pick-ups in yields for CCT, CRCT, FEHT, MLT, MIT and SPH REIT. They benefit from low gearing, low interest costs and high asset yields. 
  • Despite falling short previously, CCT’s gearing-adjusted yield is marginally higher than that of SUN REIT. 
  • Maintain OVERWEIGHT on the REITs sector. 
  • Our top picks are ART, CCT and MLT. 


WHAT’S NEW 


• Levelling the playing field. 

  • We compare REITs on a gearing-adjusted basis by stretching the balance sheets of all REITs to the allowed maximum limit of 45% and comparing their dividend yields. 

ACTION 


• Maintain OVERWEIGHT; top picks are ART, CCT, CRCT and MLT. 

  • We observe CCT, FEHT, MLT, MIT and SPH REIT reaping the pick-ups from low gearing levels and interest costs, registering the highest pick-ups in yields in their respective sectors. Our analysis indicates that CCT’s gearing-adjusted yields are marginally higher than Suntec’s despite CCT’s lower current yields. Highly diversified MLT displays clear yield pick-up on a gearing-adjusted basis. 

ESSENTIALS 

  • Stretching balance sheets to the fullest. At existing borrowing costs, we assume all REITs embark on completely debt-funded acquisitions, issuing fresh debt and stretching their balance sheets to the fullest (45% leverage). We assume all acquisitions are made based on their respective cap rates. The positive differential between the asset yields and borrowing costs boosts DPU yields. Current yields are used for comparison to normalise for forex hedging costs. 
  • Low gearing, low borrowing costs and high asset yields are key drivers of strong pick-ups in yields. We observe CCT, CRCT, FEHT, MLT, MIT and SPH REIT reaping the pick-ups from low gearing levels and interest costs, registering the highest pick-ups in yields in their respective sectors. 
  • CCT’s yields marginally higher than Suntec REIT’s on a gearing-adjusted basis, despite CCT’s lower current yield of 6.4%, 9bp below SUN’s 6.49%. The full effect of leverage implies a slightly better (8bp higher) yield for CCT (6.88%) vs SUN’s 6.83%. We note the implied gap between CCT’s and KREIT’s yields (7.27%) more than halved post gearing adjustment from 80bp to 39bp. 
  • CDREIT crosses the gap after balance sheet is stretched. Although CDREIT’s headline yield (7.66%) is 53bp short of OUE Hospitality Trust’s 8.2%, its implied yield of 8.34% stands nearly at parity with OUEHT’s (8.35%) once we stretch its balance sheet. FEHT also displayed a remarkably strong pick-up in yield of 75bp to reach an implied yield of 8.13%. Both REITs clearly benefitted from low gearing levels of 31.9% and 31.4%, and low borrowing costs of 2.7% and 2.5% respectively. 
  • Strong pick-ups in yields of both well-diversified MLT and MIT, courtesy of low interest costs. While MLT’s current yield of 7.68% is slightly lower than that of Soilbuild’s 7.73%, SBREIT’s high borrowing cost of 3.5% (MLT: 2.2%) clearly shows in its implied yield of 8.08% vs MLT’s higher implied yield of 8.57%. We note that both MLT and MINT display the highest pick-ups in yields of 89bp and 85bp within the industrial space, with MINT (7.52%) extending its spread over AREIT (7.52%) in gearing-adjusted implied yields from 126bp to 164bp. 
  • SPH’s yield of 6.3% exceeds that of CMT’s 6% on a gearing-adjusted basis due to its relatively low gearing and debt cost. Similarly, FCT’s yield spread widens significantly over CMT’s post leverage adjustment (70bp higher vs 33bp previously). We also acknowledge the low base effect of FCT’s (S$2.49b) much lower portfolio value as opposed to CMT’s S$9.9b. 
  • Despite higher borrowing costs, CRCT’s low gearing of 27.5% over MGCCT’s 41.2% would result in a higher implied leveraged yield of 87bp for CRCT (8.75% vs 7.88%) compared to similar current yields at 7.66% and 7.63% respectively.


TOP PICKS 




PEER COMPARISON 




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-06
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.41 Same 1.41
BUY Maintain BUY 1.79 Same 1.79
BUY Maintain BUY 1.28 Same 1.28


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