Singapore REITs : What are the “true” yields?
Upgrade AREIT, CT to BUY; still relatively cautious on KREIT
October 2, 2013
Action: Removing short-term boosts, what are the “true” yields?
Rather than focusing too much on what the Fed is or isn’t going to do, we believe the key question is what are the potential yields in the long run if we were to assume: 1) a long-term cost of debt (adjusted for a matched currency mix of assets and debts); 2) all management fees are paid in cash; and 3) no rental support – ie, the “true” yields?
Our analysis suggests:
•Cost of debt could rise 0.4-2.4pp from the current level in the long run, with CT least impacted (+0.4pp) and KREIT most impacted (+2.4pp);
•Removing the short-term distribution boosts, the “true” yields could be 0.4-2.8pp lower, with the lowest difference at CT (-0.4pp) and the highest difference at KREIT (-2.8pp);
•Our estimates suggest AREIT, CCT, CT, SGREIT and CDREIT still offer a reasonable return over the long-term risk-free rate, even after removing the short-term distribution boosts, when compared to the trough spreads these REITs have traded at in the past.
Catalyst: Interest rate concern – not if but when
While the market has laid aside the concern over an imminent rise in interest rates, at least for now, we believe the analysis done in this report will likely come in handy as and when the concern returns.
Valuation: Upgrade AREIT, CT to BUY; CDREIT, KREIT to NEUTRAL
We believe AREIT and CT still offer relative value in the current market, considering: 1) estimated “true” yield spreads of 2.1-3.3pp vs trough spreads of 1.9-2.6pp; 2) above-average projected 3-year DPU CAGRs of 4.5-4.6%; and 3) reasonably geared balance sheets. We have therefore upgraded the rating for these to Buy. We also upgrade CDREIT and KREIT to Neutral on valuations but remain relatively more cautious on KREIT amongst the REITs we cover.
Publish date: 02/10/13