Tuesday, June 11, 2013

Singapore REITs - As the dust settles, value emerges

S-REITs’ ability to grow distributions to compensate for rising bond yields/interest costs a key consideration. We believe that fears of the impact of rising bond yields on S-REITs are an over-reaction at this point as our economists do not expect QE to taper off anytime soon. Over the medium term, a rise in long bond yields is likely to be more gradual than abrupt and S-REITs’ continued ability to grow distributions (estimated at 4.0% y-o-y) is a compensating factor. Thus, we believe that the knee-jerk reaction seen in the S-REITs’ share prices (FSTREI index was down 10% YTD vs STI 5% dip in the past few weeks) is unwarranted. 

Impact of rising bond yields “more expected than real”.  We have assessed the impact of rising bond yields on our target prices, and the conclusions are: (i) Our analysis indicates that S-REIT yield spread of 3.9% based on current share prices have factored long bonds of >2.5%. Prior experience shows that S-REITs trade at a 350-390 bps spread when long bonds were above 2%. (ii) Impact from higher interest costs is managable at <3 b="">  Active capital management has resulted in most S-REITs locking in >50% of their debt costs for the next 1 - 2 years. We estimate a 0.5% increase in interest rates to have a <3 as="" b="" distributions="" impact="" managable.="" nbsp="" on="" see="" we="" which="">(iii) NAVs appear safe for now. Worries of cap rate expansion impacting S-REITs’ book values negatively are valid but we do not see it as a concern at this point. Other than for office, we note that higher valuations for S-REIT portfolios (retail, industrial sub-sectors) are underpinned by higher income, which we believe make S-REITs’ NAVs more resilient.   

Translation losses a potential risk. The INR, AUD and JPY weakened 2%, 7% and 27% against the S$ respectively since the start of 2013. Thus, S-REITs with exposures in these currencies might see earnings downside and NAV declines from translation losses. From the earnings front, we note that most S-REITs have taken hedges to minimize impact. 
S-REITs sell-off is over-done, Selective BUYs. We have been advocating a selective stance, and limit our picks to REITs which offer growth that is achievable and visible. We like Magic (BUY, TP S$1.22),MCT (BUY, TP S$1.53), FCOT (BUY TP $1.69) and Cache (BUY, TP S$1.47) for their better than peers’ growth prospects. We have also upgraded A-REIT (BUY, TP S$2.60) and MINT (BUY, TP S$1.63) from HOLD to BUYs on valuation grounds. 


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