Analysis Of Singapore Real Estate Investment Trusts (REITs)
Summary
Since the debut of Real Estate Investment Trust (REITs) in Singapore in 2002, the number of REITs listed on Singapore Exchange have increased dramatically to 42. The complexity of S-Reits have also increased throughout these years whereby more Reits are willing to explore into new industries such as Industrial, Logistics and Data Centres as compared to traditional sectors like retail or hospitality. This enables investors to diversify into more sectors of the economy.
Benefits Of Reits
During times of low interest rate, the high yield that REITs offer allows dividend investors to receive attractive returns. For example, the Lion-Phillip S-REIT ETF offers a dividend yield of 4.56% as compared to the mere 0.90% interest we would receive for DBS multiplier account. (Image Credit: www.dividends.sg)
Current Outlook
Just like any other investments, REITs are not spared from the volatility and risks that exists within the stock market. The recent outbreak of COVID-19 has resulted in a majority of Reits to experience a sudden disruption to their revenue. As of 31 December 2020, iEdge S-Reit index is down 6.4% since the start of the year, compared to a a dip of 13.6% for the Straits-Times Index (STI). S-REITs are positioned to perform better than majority stock indices for the year 2020.
My Personal Take
Personally, I am invested in multiple REITs from different industries. This allows me to diversify and maintain my overall dividend yield even when a particular industry is not performing well. This is prevalent during COVID-19 where the sudden circuit-breaker measures have caused Retail and Hospitality REITs to suffer, resulting in their Distribution-Per-Unit (DPU) to fall. However, the pandemic has also allowed the Industrial and Logistics REITs to prosper given the work-from-home trend and online shopping culture which increases the demand for warehouses and data centres. Majority of REITs in this sector have managed to maintain or increase their DPU.
I also tend to lean towards REITs that have strong financial position. I analyse indicators such as Gearing ratio, Interest-Coverage Ratio, PE ratio, Net-Asset-Value and WALE.
I am bullish on REITs such as Frasers Centrepoint Trust (J69U.SI), Capitaland Integrated Commercial Trust (C38U.SI), Ascendas Reit (A17U) and Frasers Logistics & Commercial Trust (BUOU.SI).
I will provide my analysis on the above companies in the paragraphs below.
Industrial Reits
The prevalence of online shopping has accelerated in the past few years. Massive discounts such as the 11:11 sale and Black Friday offered on various platforms have encouraged consumers to shop online. Hence, more storage spaces in the form of last-mile delivery centers are needed to store the goods before delivery to the consumers. Thus, I believe that Frasers Logistics & Commercial Trust is able to profit from this trend. According to the FY2020 annual report, the PE ratio is 8 which is considerably lower as compared to peers in the same sector (Based on 2 Jan 2021, FLCT is trading at S$1.41/unit). The gearing ratio is 37.4% which is lower than the regulated 50% imposed by the government. The P/B ratio is 1.3 which is lower than my maximum limit of 1.5. It has also managed to experience continued growth in revenue from 2017-2020. These factors are very satisfactory and makes this trust a potential option for your portfolio.
(Image credit: https://flct.frasersproperty.com/financial_information.html)
Given that more workers are mandated to work from home and students have embarked on online learning, usage of internet have increased exponentially during this period. Hence, important services such as data storage, backup and recovery, data management and networking which are crucial for the smooth operations of the company have to be contained in data centres. The ability to utilise the cloud computing offered by data centres allow employees to access the company network and work anytime anywhere. The limited supply but increased demand for data centres have made it lucrative for REITs that are invested in this area.
Ascendas REIT is an excellent choice for investors trying to diversify into the logistics sector. Its portfolio consists of both industrial buildings and data centres located around the world. Since Ascendas has yet to release its FY2020 annual report, I base my analysis on its 3Q2020 and 2H2020 financial statement. Its gearing ratio is at 34.9% which is lower than Mapletree Industrial Trust’s ratio of 38.1%. The P/B ratio is also at 1.36 which is within my acceptable range (Based on 2 Jan 2021, Ascendas is trading at S$2.98/unit). Also, the Weighted Average Tenure Of Debt is 3.7 years compared to 3.2 for Mapletree Industrial Trust. With a well-spread debt maturity, this prevents Ascendas from facing major liquidity problems in the near future.
(Image credit: https://ir.ascendas-reit.com/financials.html, https://www.mapletreeindustrialtrust.com/Investor-Relations/Financial-Information/Financial-Results.aspx)
Furthermore, rents in Industrial Reits are priced to provide stability and growth for the landlord. WALE for Frasers Logistics & commercial Trust and Ascendas are 4.9 and 3.9 years respectively. The long WALE for industrial properties helps to ensure maximum portfolio occupancy as well as stable income visibility. Moreover, companies are less inclined to move from properties to properties when their lease expires due to the difficulty in relocation. This allows for rental escalation which benefits the investors since higher NPI, allows for higher DPU ceteris paribus. DPU for Frasers Logistics & Commercial Trust has increased 1.7% Y-O-Y.
Retail Reits
With governments enforcing that citizens only head out when necessary, consumers have no choice but to resort to online shopping as well as suburban malls to satisfy their daily needs. This has resulted in malls located in the cities to experience a severe decrease in footfall and tenant sales. The prospects of a recession has also prompted consumers to postpone any discretionary spending. Since most rental structure of tenants are determined based on a basic fixed rent and a portion of tenants sales, the implementation of rental relief framework has caused the revenue for major retail landlords to decrease tremendously.
The successful battle against COVID-19 in Singapore has allowed retail landlords to benefit. Since the start of Phase 2, footfall and tenant sales managed to increase close to pre-COVID levels. From my perspective, suburban malls will prove to be more resilient compared to central malls since they are located within residential neighbourhood and this catchment provides malls with footfall. In addition, there are more shops allocated in suburban malls for necessities, which are essential during a pandemic. As a result, there has been a narrowing trend for the prices between the rental of suburban and central shops.
Frasers Centrepoint Trust, which owns the most suburban malls in Singapore after acquiring 100% of AsiaRetail Fund, has established itself to emerge stronger after this pandemic. For FY2020, Frasers Centrepoint Trust has reported that tenant’s sales and shopper’s traffic have recovered to 94.4% and 60.2% of pre-COVID times respectively. It also managed to achieve a positive rental reversion for its portfolio, which is remarkable given the economic uncertainty during this pandemic. Its financial position is also stable to weather the REIT through this pandemic. With a gearing ratio of 35.9% and assets/liabilities(A/L) ratio of 2.89, I believe that Frasers Centrepoint Trust will not default on any upcoming loans.
(Image Credit: https://fct.frasersproperty.com/financial_information.html)
With the recent news of a COVID vaccination programme being launched worldwide, Capitaland Integrated Commercial Trust is able to position itself for the recovery in a post-COVID world. Prior to the merger, Capitaland Mall Trust was able to enjoy growth in its Net Property Income (NPI) from 2015-2019. Based on its FY2019 annual report, the low gearing ratio of 32.9% and A/L ratio of 2.95 emphasis its superior financial standing. When mass air tourism is normalised again, its city central malls will be able to benefit from the increased tourism receipts, which indirectly increases the rental received. With the current merger, the combined entity allows unit-holders to reap the benefits of the office REITs, which rebounded more quickly as compared to retail REITs. However, my concern for this merger is the massive debt (Close to 1 billion SGD) that are being incurred. Even though this increases the financial liability, the increased credit facilities and strong support from its sponsor (Capitaland) allows unit-holders to have more benefits than drawbacks when the pandemic is over.
(Image Credit: https://investor.cict.com.sg/ar.html)
Disclaimer: The information provided is a representation of my own views and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.