Singapore REITs - UOB Kay Hian 2015-11-11: Levelling The Playing Field: Putting It All Together

Singapore REITs - UOB Kay Hian 2015-11-11: Levelling The Playing Field: Putting It All Together REIT ASCOTT RESIDENCE TRUST A68U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI  MAPLETREE LOGISTICS TRUST M44U.SI 

Singapore REITs - Levelling The Playing Field: Putting It All Together 

  • Our comparison of S-REITs by factoring in debt headroom on a probability adjusted basis resulted in ART, AIMSAMP, CCT, FHT, MLT and MGCCT registering the highest pick-ups in their respective sectors, reaping the benefits of diversification, low gearing levels and interest costs. 
  • CCT’s hedged gearing adjusted yield trumps that of KREIT by virtue of low gearing, while ART stands out relative to peers on a risk-adjusted basis. 
  • Maintain OVERWEIGHT with ART, CCT and MLT as top picks. 



WHAT’S NEW 


 Leveling the Playing Field: Putting it all together. 

  • Summing our Levelling the Playing Field series, we review the combined effect of gearing adjusted yields and forex hedging implications. We compare the S-REITs by factoring in debt headroom on a probability adjusted basis and imposing forex hedging to these forward yields. 
  • We have assumed that the resulting geographic split remains unchanged post the acquisitions. Factoring in volatility also threw up a few interesting observations. 

ACTION 


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

  • We observe ART, AIMSAMP, CCT, FHT, MLT, and Mapletree GCC (MGCCT) reaping clear benefits of geographic diversification, low gearing levels and interest costs. 
  • Our analysis indicates that CCT’s low gearing stands it in better stead than KREIT. Highly-diversified MLT displays a clear yield pick-up on a hedged gearing-adjusted basis. 

ESSENTIALS 


 Stretching balance sheets and hedging resulting yields. 

  • At existing borrowing costs, we assume 
    1.  REIT managers embark on completely debt-funded acquisitions, issuing fresh debt and with a 50% probability of stretching their balance sheets to the fullest (45% leverage). 
    2.  All resulting yields are hedged according to the current respective geographic exposure by REIT (resulting geographic split remains unchanged post acquisition) 
    3.  All acquisitions are made based on their respective cap rates, with the positive differential between the asset yields and borrowing costs boosting forward DPU yields. 

 Low gearing, low borrowing costs and geographic diversification are key drivers of strong pick-ups. 

  • We observe ART, AIMSAMP, CCT, FHT, MLT, and MGCCT reaping the benefits of geographic diversification, low gearing levels and interest costs, and registering the highest pick-ups in their respective sectors. 

 CCT dominates KREIT in terms of adjusted upside. 

  • The primary cause of the remarkable outperformance was CCT’s much lower aggregate gearing of 30.1% in comparison to KREIT’s 42.6%. CCT also enjoys marginally lower cost of borrowing at 2.4%, vs KREIT’s 2.5%. 

 Diversification is the theme of the day in hospitality. 

  • Both ART and FHT displayed the clearest pick-ups to fair yields in both observed and adjusted yields. Both REIT managers owe much to the benefits of venturing overseas, as evidenced by their respective hedging premiums. We note the limited debt headroom for both ART and FHT. 

 Strong pick-up in well-diversified MLT, courtesy of geographic diversification and low interest costs. 

  • While MLT’s forward yield of 7.66% was ostensibly lower than Soilbuild’s 8.00%, SBREIT’s high borrowing cost of 3.2% (MLT: 2.3%) and lack of a geographic kicker clearly shows in its adjusted upside of 17.9% vs MLT’s higher implied yield of 40.5%. MLT also surpassed MINT, underpinned by its broad geographic exposure (64.3% of gross assets overseas). 
  • We note that AIMSAMP, despite registering the highest adjusted upside to fair value, was bogged down by high interest costs. 

 Volatility adjustments throw up interesting observations. 

  • We have assumed a riskfree rate of 3% when using our adjusted hedged returns to derive our risk-adjusted returns. Interestingly, despite emerging on top of KREIT earlier, CCT offered a marginally lower risk-adjusted return. 
  • In addition, though ART and FHT competed fiercely in offering the highest adjusted yields within the hospitality space, volatility adjustment identified ART as the clear winner. 

 ART, AAREIT, CCT, FHT, MLT and MGCCT 

  • ART, AAREIT, CCT, FHT, MLT and MGCCT registered the highest pick-ups in their respective sectors, reaping the benefits of diversification, low gearing levels and interest costs. 
  • On a volatility-adjusted basis, ART, AAREIT, KREIT and Starhill Global stand out within their respective segments.


TOP SECTOR PICKS





PEER COMPARISON





Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.39 Same 1.39
BUY Maintain BUY 1.79 Same 1.79
BUY Maintain BUY 1.28 Same 1.28


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