LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)
ARA LOGOS LOGISTICS TRUST (SGX:K2LU)
FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)
MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)
FRASERS CENTREPOINT TRUST (SGX:J69U)
Singapore REITs - Defensive Posture To Weather Fluctuation In Interest Rates
- The Fed has set stringent conditions to be fulfilled before commencing hikes in the Fed Funds Rates, which implies a time gap between QE taper and interest rate hikes. We estimate that every 0.1ppt increase in costs of debts will reduce DPU by 0.6-1.9%. S-REITs with high interest coverage ratios and long average maturity of debts are better able to cope with higher interest rates.
- Maintain OVERWEIGHT.
Decoupling of QE taper and interest rate hikes.
- The Fed is scheduled to commence QE taper in Nov 21. Many investors assumed that QE taper would stretch into 1H22, followed by hikes in the Fed Funds Rate in 2H22. According to Fed governor Jerome Powell speaking at Jackson Hole Symposium on 27 Aug 21, QE taper “does not carry a direct signal regarding the timing of interest rate lift-off”. Thus, it is appropriate to infer that there would be a time gap between the two events.
Interest rate hikes subject to more onerous conditions.
- Unlike QE taper, the Fed has formalised substantially more stringent conditions to be fulfilled before commencing hikes in the Fed Funds Rate. The economy is required to reach conditions consistent with maximum employment, where inflation has reached 2% and on track to moderately exceed 2% for some time. Jerome Powell assessed that there is much ground to be covered before these stringent conditions are met.
Sensitivity analysis.
- Ceteris paribus (all other things being equal), we assessed the negative impact on DPU caused by a simulated increase in costs of debts of 0.1ppt. The negative impact ranges from 0.6-1.9%.
- Suntec REIT (SGX:T82U)’s 2022 DPU is expected to drop by 1.9% due to low interest coverage ratio of 2.8x.
- Far East Hospitality Trust (SGX:Q5T)’s 2022 DPU is expected to drop 1.7% as the hospitality industry would only benefit from a full-fledged recovery later in 2023.
Rise in costs of debts mostly contained during 2016-18.
- Most S-REITs were able to keep their cost of debts relatively stable during the last interest rate upcycle in 2016-18 when the Fed hiked Fed Funds Rate by a cumulative 2.25ppt. There are various factors that determine the magnitude of impact from fluctuations in costs of debts, including interest coverage ratio, existing interest rate for loan to be refinanced and the level of fixed interest rates locked in through hedges.
- CCT, CMT and Suntec REIT (SGX:T82U) managed to maintain costs of debts unchanged during 2016-18. Frasers Logistics & Commercial Trust (SGX:BUOU) and Keppel DC REIT (SGX:AJBU) were able to reduce their costs of debt by 0.4ppt and 0.5ppt respectively due to their expansion in Europe funded by Euro-denominated borrowings.
- Three S-REITs within the sponsor Mapletree Investments, namely Mapletree Commercial Trust (SGX:N2IU), Mapletree Industrial Trust (SGX:ME8U) and Mapletree Logistics Trust (SGX:M44U), and Frasers Centrepoint Trust (SGX:J69U) experienced larger increase in costs of debt of 0.4ppt during 2016-18. The proportions of borrowings hedged to fixed rates were lower at 74% for Frasers Centrepoint Trust and Mapletree Commercial Trust and 80% for Mapletree Logistics Trust. However, these four S-REITs have since scaled up through acquisitions and are better positioned to extend the maturity of their bank loans and minimise the impact from refinancing.
- Ascendas REIT (SGX:A17U) and Keppel REIT (SGX:K71U) experienced smaller increase in costs of debt of 0.2ppt.
Resiliency from high interest coverage ratio and long average maturity of debts.
- Parkway Life REIT (SGX:C2PU) has the highest interest coverage ratio of 21.6x, followed by 12.9x for Keppel DC REIT (SGX:AJBU), 8.9x for Lendlease REIT (SGX:JYEU), 7.0x for Frasers Logistics & Commercial Trust (SGX:BUOU) and 6.8x for Mapletree Industrial Trust (SGX:ME8U). The average maturity of debt ranges from three to four years.
- CapitaLand Integrated Commercial Trust (SGX:C38U) has the highest average maturity of debt at 4.3 years.
S-REITs becoming more resilient.
- S-REITs have scaled up due to industry consolidation and acquisitions locally and overseas. Their increased scale and diversification, geographically and by asset classes, improve their standing with bankers. Thus, S-REITs are able to garner support and obtain competitive interest rates from banks for their refinancing.
- S-REITs are disciplined in capital management. Their aggregate leverage is well within the cap of 50% imposed by the Monetary Authority of Singapore.
Moving from pandemic to endemic.
- Singapore is experiencing an exponential surge in daily cases of COVID-19 infections, which hit 1,504 on 23 Sep 21. Thankfully, ICU admission and deaths remain low. In the last 28 days, 98% of new cases are asymptomatic or have mild symptoms. Starting 14 Sep 21, Singaporeans who took their second dose of the COVID-19 vaccine in 1Q21 can make appointments for booster shots. Seniors aged 60 and above will also be given booster shots.
Maintain OVERWEIGHT on Singapore REITs.
- We keep our earnings forecast unchanged.
- We recommend a balanced mix of New Economy plays and reopening plays.
- BUY New Economy plays
- Ascendas REIT (SGX:A17U) (Target Price: S$3.83),
- Frasers Logistics & Commercial Trust (SGX:BUOU) (Target Price: S$1.79),
- Mapletree Industrial Trust (SGX:ME8U) (Target Price: S$3.63) and
- ARA LOGOS Logistics Trust (SGX:K2LU) (Target Price: S$1.02).
- BUY reopening plays
- Ascott Residence Trust (SGX:HMN) (Target Price: S$1.16),
- Frasers Centrepoint Trust (SGX:J69U) (Target Price: S$3.06) and
- Lendlease REIT (SGX:JYEU) (Target Price: S$1.01).
Sector Catalysts
- 82% of Singapore’s population has completed their full regimen and received two doses of COVID-19 vaccines, which paves the way for the easing of safe distancing measures, normalisation of economic activities and an eventual pick-up in GDP growth.
- Limited new supply for the office, logistics and retail segments in 2021.
Sector Risk
- A prolonged wave of COVID-19 Delta variant infections.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-09-24
SGX Stock
Analyst Report
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SAME
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