Singapore REITs - UOB Kay Hian 2016-01-05: Interest Rate Impact Revisited

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 

Property – Singapore REITs: Interest Rate Impact Revisited 

  • The impact of the interest rate hike on S-REIT distributions is minimal in the near term (0.4-3.8% drop in DPU for a 100bp rise) due to the long debt maturity period and high proportion of fixed-rate debt. 
  • Even the punitive case of refinancing of total outstanding debt due outright (5.5-13.8% drop in DPU for a 100bp rise) has been more than priced in by the market. 
  • We remain OVERWEIGHT, preferring deep value and diversified REITs, with ART, CCT and MLT as our top picks


WHAT’S NEW 

  • Following the recent move by the Fed to raise short-term interest rates, we revisit the implied impact on REITs’ trading yields. 


ACTION 


• Maintain OVERWEIGHT; interest rate hike priced in. 

  • The impact of the interest rate hike on S-REIT distributions is minimal in the near term (0.4-3.8% drop in DPU for a 100bp rise) due to the long debt maturity period and high proportion of fixed rate debt. 
  • Even the conservative case of refinancing of total outstanding debt due outright (5.5- 13.8% drop in DPU for a 100bp rise) has been priced in by the market. We are already adopting a risk-free rate of 3% and opine that the market has likely factored in a more punitive 140bp pick-up in interest rates. 
  • We remain OVERWEIGHT, preferring deep value and diversified REITs with ART, CCT and MLT as our top picks


ESSENTIALS 


• Minimal impact in the near term... 

  • Assuming a standardised interest rate hike of 100bp, REIT managers estimate the near-term negative impact on total return/distributions at 0.4-4.6% (please refer to the table below). 
  • The estimates are markedly lower than our longer-term impact of up to 13.8% primarily as we have assumed complete refinancing of outstanding debt as opposed to using the REITs’ layered debt maturity profile. 
  • 3M SIBOR also saw a 68bps (150%) spike in Jan-Sep 15 to 1.14% (26% in 10-year SG bonds to 2.88%). The minor 5 bps (4%) increase in 3M SIBOR (5.7% in 10-year SG bonds to 2.6%) since the decision to increase interest rates seems to suggest that the bulk of the SIBOR impact had already occurred in 9M15. 
  • The long debt maturity period of 3.6 years would mean minimal impact in the near term. 

• …as sources of funding diversify. 

  • The average debt maturity across REITs within coverage has more than doubled from the GFC period, requiring less debt refinancing in the near term. REIT managers have tapped on Medium-Term Notes (MTN), going beyond banks to attain long-dated debt. Examples include AREIT and CMT, with MTN loans maturing as far back as 2029 and 2027 respectively. 

• Already adopting a risk-free rate of 3%. 

  • This is in line with the average 10-year SG bond rate in 2003-06 of 3.1%. This is 40bp higher than the current rate of 2.6%. 

• Prefer deep value and diversified REITs. 

  • We like deep value REITs such as CCT, and well diversified REITs with significant overseas footprint, namely ART and MLT. 
  • We believe these counters will see less exposure to the slowdown in Singapore owing to an unprecedented simultaneous supply glut across sectors.


INDIVIDUAL REIT MANAGER’S SENSITIVITY ANALYSIS (FACTORS IN THE DEBT REFINANCING SCHEDULE) 




DEBT MATURITY PROFILE




PEER COMPARISON 






Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-05
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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