The news surrounding the impending increase in interest rates is gaining momentum now and I think as a vested investor in S-Reits, we need to understand the consequences of an increase in interest rates which will affect the company’s cost of doing business and their bottomline, which in turn will affect the distribution income paid to shareholders as dividends.
The first thing is Timing. Investing in S-Reits at the depth of when Quantitative Easing was just started is different from the timing of when Quantitative Easing was about to end. As I will mention more in detail later below, the impact on the cost of debt is something that an investor needs to consider rather than assuming that dividend distribution can only move upwards all the time.
The second thing is Valuations. Many investors attribute valuations to property counters by looking at their book value. Again, a quick look across the board and we can see that many of the S-Reits counters now are trading near or over their book value. In other words, you are paying the full value of what their properties are being valued right now, subject to revaluation on a yearly basis. That is hardly anything a value investor will be doing right now. Contrast this to a few property developers which are trading at half the book value and you roughly get the idea.
The third thing is Distribution Payout. By now, everyone should know that S-Reits stocks are structured in such a way that they will have to distribute out more than 90% of earnings to enjoy tax benefits. Some S-Reits even pays out the full 100% distribution of their earnings. This means that the companies are retaining very little to grow their business through inorganic merger and acquisitions or Asset Enhancement Activities. Organic growth through rental step-up will also have to be contained one day, as the increase will not be forever. Worst, it might even goes down during an economic crisis.
Anyway, back to our main discussion for this post, I shall divide it into two separate parts for our easy reference.
The first part will be focusing more on the latest update of the various Reits debt profile expiry while in the second part we will see how sensitivity analysis will help us to determine the impact to the increase in their cost of debt percentage.
Debt Expiry Profile
Many investors would have known by now that S-Reits companies thrive on leverage during the low interest rate environment that push their costs of financing low. As a result, many companies are gearing up for more organic and inorganic growth through AEI and acquisition respectively during these few years.
If you have taken a closer look at their financing terms, you would have noticed that a lot of the loans these companies were getting is on a typical 3-year loans. When the term is up, they would have to engage in further financing possibly at a higher rate. Many companies such as the Mapletree Reits Group have also tapped on their capability to issue a Medium Term Note (MTN), which is typically of longer duration and more flexibility. Many companies have also locked in a fixed rate on their debt to keep their financing not being subject to the volatility of floating interest rate.
The truth about the debt expiry profile is we will see a cycle of S-Reits companies refinancing their loans at a higher interest rate now than before. It is not something that is necessarily bad, but is something that everyone and the management would have known that it is going to happen, and it is up to us how we want to see them.
|Debt Expiry Profile|