Wednesday, August 14, 2013

Fairly good yield spread for industrial S-REITs

Fairly good yield spread for industrial S-REITs
Insider Asia
Written by InsiderAsia    
Wednesday, 07 August 2013 12:57

After being buffeted by the sharp rise in government bond yields in the past two months, triggered by talks of tapering by the US Federal Reserve, prices for Singapore-listed real estate investment trusts (REITs) appear to have stabilised somewhat in recent days.

As mentioned in our previous article, yields on S-REITs have risen — and unit prices declined — in tandem with that for the benchmark 10-year US Treasury notes and Singapore Government Securities (SGS). Having risen sharply in May, the pace of increase for yields on the 10-year Treasury notes declined in June and further in July. Yields ended at 2.67% on Monday, from 1.66% at the start of May.

To be sure, there could well be renewed volatility should the Fed begin paring back its bond purchases sooner or more aggressively than current market expectations. However, unless the US economy picks up steam significantly, incremental yield increases from hereon could continue to decline. The average yield for the 10-year note was about 3.5% in the past decade.

At prevailing prices, S-REITs are giving investors a pretty good spread of roughly 3.7%, on average, over the 10-year SGS. Additionally, shorter term rates for say, bank savings deposits are likely to remain low for some time yet — the US Fed has indicated that it intends to maintain rates at the short-end near zero well into 2015.

As such, S-REITs can be quite appealing to investors, after the recent selldown. In our previous piece, we highlighted that net yields for Ascendas Real Estate Investment Trust (A-REIT) are currently estimated at 5.8% and 6.3% for 2014 financial year (FY14) and FY15, respectively. This translates into returns some 3.4%-3.9% over and above prevailing 10-year SGS yields.

Rental outlook for the industrial properties such as logistic facilities and warehouses remain positive, having trended higher since the global financial crisis. A-REIT is the largest industrial trust listed on the Singapore Exchange and thus, trades at a premium. Smaller-sized industrial trusts are currently expected to give slightly higher yields.

MLT — positive rental reversion
Mapletree Logistics Trust (MLT), for instance, is expected to give unitholders net yields of some 6.6% and 6.8% for FY14 (ending March) and FY15 respectively. The forecast includes gains from the disposal of one of its properties totalling S$4.96 million (RM12.67 million) (equivalent to 0.2 cents per unit) over the two-year period. Excluding the disposal gain, MLT still recorded 4.4% year-on-year (y-o-y) increase in distribution per unit in the latest first quarter (1Q) of FY14.

Just over a quarter of the leases due in the current financial year was renewed in 1QFY14, with an average rental reversion of 17%. In FY13, the average rental reversion was 15%.

MLT’s portfolio occupancy stood at 98.2%. The portfolio has a fairly long weighted average lease expiry (WALE) of 5.1 years, offering good visibility for future income. About 40% of total net lettable area (NLA) is due for renewal only in FY17 and beyond.

Its portfolio is valued at S$4.1 billion with assets in Singapore, Japan, Hong Kong, South Korea, China and Malaysia. Gearing stood at 34% with average debt maturity of four years. Some 70% of total borrowings have been hedged into fixed rates, thus lowering the trust’s exposure to future rate hikes.

CIT — smaller but better yields
Cambridge Industrial Trust (CIT) is much smaller in size (in terms of assets and market capitalisation) compared with A-REIT and MLT but expected to offer better yields, estimated at 7.3% and 7.6% for 2013 and 2014 respectively.

Its stable of assets consists, primarily, of logistics, warehousing as well as light and general industrial properties located across the island state worth some S$1.29 billion. The existing portfolio has a WALE of 3.4 years. Occupancy is steady at 98.4%.

In its latest earnings results for 2Q13, CIT registered 5.1% y-o-y growth in distribution per unit on the back of new acquisitions as well as higher rental rates. The trust achieved 5% to 10% rental reversion for some 6% of total NLA renewed in the first six months of the year.

Part of its strategy going forward is to undertake asset enhancement initiatives (AEI) to optimise the plot ratio for existing properties and recycle capital from the disposal of select assets. Gearing stood at 35.8%, the bulk of which will come due next year. CIT is in advanced discussions with various banks on refinancing, which should be finalised by end-2013.

Cache — room for acquisitions from sponsor
Cache Logistics Trust has the smallest market capitalisation amongst those mentioned above. The trust, nonetheless, also delivered a solid set of earnings results in 2Q13.

Revenue was up 16.5% y-o-y to S$20.4 million while income available for distribution was 19.8% higher on-the-year at S$16.6 million. The increase was attributed to full quarter contributions from a property acquired in April as well as rental escalation on existing master leases. We estimate fairly attractive net yields of 7.2% and 7.3% for 2013 and 2014 respectively.

Its portfolio consists of 13 properties — 12 of which are located in Singapore and one in Shanghai, China — worth a combined S$1.03 billion. All the properties are fully occupied with WALE of 3.6 years.

Cache has comparatively low gearing, of 29.2%, of which some 70% is hedged into fixed rates with the earliest due in 2015. It has room to acquire yield accretive assets to bolster earnings — there are currently 13 pipeline assets covered by rights of first refusal granted by its sponsor.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article first appeared in The Edge Financial Daily, on August 07, 2013.

Publish date:07/08/13

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