Friday, August 16, 2013

Is this the end for REITS?

News of Quantitative Easing (QE) tapering from the FED are getting stronger day by day as we see plenty of retail investors who start to worry about the possible rise in interest rates. Economists and Analysts are cautioning investors to watch out for Sept 17 where more than 65% believe that it will finally be the day the FED is going to reduce its bond buying purchase and increase interest rates. Will this be the start of funds outflow from the traditionally strong equity and property markets into a safe heaven US dollar and Gold? And how will this impact REITS - a market which has enjoyed much capital appreciation for the past couple of years.

Well, the market can be irrational in those moments of madness. And in these moments the likelihood is that the prices for REITS will go south. But does interest rates increase means the end for REITS? I personally don't think so. In fact, I feel it is a good chance, especially for investors who has missed the previous buy-in to go long on REITS cautiously in order to provide a greater yield boost to the portfolio. So in this exercise, I have listed down the REITS - each divided into individual sectors - by a couple of matrix: NAV, Gearing ratio, Effective interest rate (cost of debt), Interest Coverage Ratio and Yield.

Amongst the 5 matrices listed, my favorite when choosing for REITS are the Gearing, Cost of Debt and Yield. I am not a big fan of the NAV and Interest Coverage Ratio as their ways of calculation may differ company to company. For instance, some may calculate the Interest Coverage Ratio by using EBIT/Interest costs while another uses the Net Property Income (NPI)/Interest Costs. Both methods will result in different outcomes which makes it difficult for comparison purpose. Also, some REITS may also include one-off items in its interest costs such as early redemption fees on Notes borrowed etc hence making it unfavorable for comparison. Nevertheless, it is still a good tool as it gives us an overall indicator of the ability of the company to repay its interest costs. The higher the ratio obviously indicates the better they are in paying off their finance related costs.

Retail Sector

Retail SectorCurrent PriceNAVGearing (Debt/Assets)Effective Int. RateInt. Cov RatioCurrent yieldFwd yield
CapitaMall$2.00 $1.68 34.9%3.40%4.2x5.07%5.45%
CapitaRChina$1.42 $1.42 23.5%2.58%9.1x6.70%7.04%
FrasersCT$1.87 $1.54 30.4%2.72%6.3x5.88%6.00%
LippoMalls$0.48 $0.57 24.2%4.93%4.1x7.50%7.91%
MapletreeGCC$0.92 $0.95 41.5%2.00%4.2x5.87%6.40%
Starhill$0.81 $0.88 30.3%3.03%5.3x6.17%6.17%
SPH Reit$0.98 $0.89 27.3%2.20%-5.12%5.32%

Retail sector is one of the most resilient sectors in the Singapore REITS market. Most of the retail REITS are backed by strong sponsors who managed to obtain low costs of financing for its REITS. Recent IPOs REITS - MapletreeGCC and SPH Reits stand out for me in terms of their extremely low costs of financing, at 2% and 2.2% respectively. CapitaRChina numbers looks very even in terms of the gearing, costs of debts and yields. This could be the dark horse which I might add to my portfolio should retail REITS plummet downwards.

My Pick: CapitaRChina

Industrial Sector

Industrial SectorCurrent PriceNAVGearing (Debt/Assets)Effective Int. RateInt. Cov RatioCurrent yieldFwd yield
AimsAmp$1.45 $1.50 25.4%2.80%4.9x7.58%8.27%
Ascendas$2.28 $1.94 28.6%3.09%5.7x6.32%6.67%
Cache$1.15 $0.96 29.2%3.48%6.3x7.57%7.83%
Cambridge$0.66 $0.67 35.8%4.01%4.6x7.88%8.48%
MapletreeLog$1.09 $0.92 34.0%2.40%6.6x6.42%6.60%
MapletreeInd$1.36 $1.11 35.8%2.40%7.0x6.84%7.13%
Sabana$1.15 $1.06 37.1%-4.2x8.35%8.26%

The Industrial sector's trend looks to be going downwards as probably seen from the relatively higher yield compared to other sectors. I have been contemplating about getting Cache and Ascendas but their costs of debts look to be on the higher side as compared to the MapletreeLog and MapletreeInd. In addition, most of them are on the relatively higher side of the gearing. Since this industry is facing some headwinds, the probability of prices falling is greater than other sectors. I will be picking up counters when the yield become enticing to my portfolio cashflow.

My pick: Cache

Commercial Sector

Commercial SectorCurrent PriceNAVGearing (Debt/Assets)Effective Int. RateInt. Cov RatioCurrent yieldFwd yield
CapitaComm$1.40$1.65 28.9%2.80%5.1x6.45%6.45%
FraserComm$1.24 $1.45 39.5%2.80%4.2x7.13%7.37%
Keppel Reit$1.23 $1.27 44.2%2.16%4.8x6.37%6.45%
MapletreeComm$1.16 $1.07 40.8%2.22%4.8x6.03%6.17%
Suntec$1.57 $2.04 36.5%2.68%3.4x5.80%6.11%

The Commercial sector is on the trend up. I am liking this sector due to the recent economic pick up which translates into higher rental yield for these REITS. The gearing is certainly on the higher side for the commercial sector but forward dpu looks to be the most potential in increasing its payout. With revising rentals to come in 2014, I don't think they will proceed with any acquisitions just yet and hopefully that means no raising of equity in the near term.

My Picks: CapitaComm/FraserComm

Hospitality Sector

Hospitality SectorCurrent PriceNAVGearing (Debt/Assets)Effective Int. RateInt. Cov RatioCurrent yieldFwd yield
AscendasHT$0.80 $0.77 35.4%2.90%-6.75%7.00%
Ascott$1.25 $1.36 40.2%3.10%4.2x7.15%7.28%
CDL Trust$1.58 $1.60 29.7%-9.0x6.90%7.03%
FarEastHT$0.87 $0.96 29.3%2.20%9.1x6.61%7.12%
OUEHT$0.88 $0.90 33.2%2.80%-7.30%7.40%

The hospitality sector is currently on a falling knife trend. It is falling so fast that the yield is almost all back to 7%. This is a cyclical industry and when the right time comes, this would be a great place to put your money in. I like the low gearing and low costs of financing for FEHT as compared to others. It is definitely in my radar right now.

My pick: FEHT

Healthcare Sector

Healthcare SectorCurrent PriceNAVGearing (Debt/Assets)Effective Int. RateInt. Cov RatioCurrent yieldFwd yield
First Reit$1.18 $0.90 33.4%-7.0x6.40%6.80%
ParkwayLife$2.32 $1.55 31.2%1.52%10.2x4.75%4.75%

The healthcare sector is the most defensive of all sectors, given their nature of business. Plife has the lowest costs of financing and highest interest coverage ratio and it can be seen from its lowest yield payout amongst all other REITS. If Plife can yield above 5%, I would not hesitate to pick it up.

My pick: Plife

What about you?

What do you think will happen to REITS when interest goes up?


  1. Hi, how did you get the figures for the effective interest rate? Does this mean the interest rate that the company is paying for its loan?

    thanks :)

    1. Hi Ang

      Yes the interest rate is the average cost of debts the company has to pay on its loans. Some of the loans may be fixed while some may be floating. For e.g fct has about 80%+ on fix rates and 20% on floating so even if the interest rates go up they have already fixed the interest rates hence.not affected so much.

      Yoy might see that for the new ipos sph reit and feht all have low interest cost of debts. Thats because of the low interest rates environment and mayne the strong sponsor pipeline they had as their backing.

      The rates are avaialble in their financial statements or prospectus for ipos.

    2. hi, thanks for your reply. i wasn't aware that the rates are available in their financial statements. sorry for my ignorance :)

  2. Hi B,

    A really useful summary of the Reits landscape, especially for a REIT newbie like me!

    Instead of being the end, I see it as the start of my REits buying spree, that is, if interest rates do rise and the price of most reits fall by >10%. That would make some Reits like Suntec much more attractive to me.

    Based on my assessment, I also view Parkway more as a bond and a bond that pays >5% is indeed a good deal.

    1. Hi HWW

      You are right. My bullets are similar like yours ready to missile on the REITS which has potential. Which particular REITS will you be looking at? At current writing, REITS are down again by around 2%. It looks like the yield is getting better than what I have listed above. YUMMY!!!

  3. Hi B,

    Ya, I just missed out on getting First Reit at $1.11. Fingers were too slow on my mobile app. Let's see if the fall continues tomorrow.

    I like PLife, Suntec, CapitaComm because most of their portfolio are in this country. However, I am prepared to be vested in most if the price is right, just like First Reit today.

    1. Hi HWW

      I'm getting tempted also on a few of the shares. I am very tempted to enter on CapitaRChina, Capcomm and FEHT and of course the other industrial sectors also are getting lower price.

      Let's see how it goes tomorrow. Another down like today and I will be picking up counters.

    2. So any good catch today? It's a sea of red today and Reits were not the only ones which were affected.

      Was catching a falling knife today with First Reit. Haha.

    3. Hi HWW

      Did I write this article long ago? hehe It's only been 2 days and First Reit has gone down to the bottom $1.

      I also added First Reit like you today, guess somewhat catching on a falling knife.

      I bought at 1.075, 1.05 and 1.02

      What about you?

    4. Hi B,

      Haha, a timely article then.

      The big fall in the Indo stock market is creating this opportunity for us. Just have to thank my lucky stars I didn't bought yesterday.

      For your info, I bought at 1.035.