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Office S-REITs VS Industrial S-REITs.

Sunday, September 26, 2010

An earlier blog post on FCOT, CCT and K-REIT attracted much attention and many comments.  A friend asked me offline if I would invest in any of these REITs.  

Well, I have some pre-historic investments in FCOT and K-REIT while my investment in CCT was divested a few months back.  

Although I am not enthusiastic about office S-REITs, I am aware of what analysts are saying about how office rentals have bottomed in Singapore and that things are looking up.  So, office S-REITs should perform better from now.  The operative word here is "should".

Looking at the numbers, I still very much prefer industrial properties S-REITs and regular readers would know that I favour AIMS AMP Capital Industrial REIT (AA REIT).  With an XR DPU of 2.08c, its yield is 9.45% at the latest closing price of 22c. XR gearing level is 34.8%.  

With an interest cover ratio of 4.21x (correct as of 22 June 2010), it easily trumps CCT's 3.8x, K-REIT's 3.6x and, of course, FCOT's 2.74x.  

Furthermore, AA REIT's latest acquisition is yield accretive and it has managed to re-finance a S$175m loan due in 2012 at a better interest rate (from 3.5% to 2.16%), reducing interest cost.  So, its interest cover ratio should be higher in the near future.  This is a very promising REIT and I would accumulate on weakness.

A friend asked me about Mapletree Logistics Trust (MLT) recently. I remember that its yield is lower and that it has rather high gearing. Looking at its presentation slides of 25 July 2010, MLT's annualised DPU is 6c which means a yield of 6.82% at the latest unit price of 88c.  Gearing is at 38.8%.  Its interest cover ratio is 5.9x!  This probably explains its popularity.

On 28 July 10, I blogged about MLT's purchase of three distribution centres in Japan for a total of JPY13b or S$200m. At that time, I said "with these latest acquisitions, gearing level would be pushed up to 43.6%.  One wonders if Mapletree Log would go to unitholders with hat in hand in the near future or, perhaps, do a share placement."

As per expectation, recently, MLT launched an equity fund raising to raise approximately S$300 million in capital mostly to fund acquisitions in Singapore, Japan and South Korea.  Without the equity fund raising, MLT's gearing would be at 46% which is uncomfortable.  With this exercise, gearing level would be maintained at 38%.

So, what is my take? Although there is consensus that office S-REITs should do better from now, I would stick to industrial S-REITs as the numbers speak for themselves. 

Don't let my opinion stop you from buying into office S-REITs though.  Value is what we get and price is what we pay.  FA can never do the job of TA.  Good luck.

Related posts:
AIMS AMP Capital Industrial REIT: Rights issue.
Mapletree Log: Acquires properties in Japan.


Anonymous said...

Actually, I think the reason why the industrial reits yield is higher is due to their shorter lease-span. Most of their lease expires in 4 decades while office reits lease last twice as long. So while historic yield may be higher for industrial reits, the real yield should be quite similar.


AK71 said...

Hi Nick,

If we look at MLT, actually 25.6% of their land lease expire 41 to 50 yrs from now and 42.4% of their land lease has more than 60 years left. :)

With AA REIT, only 16.54% of its land lease expires between 2037 and 2046. 57.32% expires between 2047 and 2056. How much of this is >40 years, I don't have the details. The rest of its land lease last beyond 2056.

Of course, there is the possibility of REITs owning freehold industrial real estate and both MLT and AA REIT have some. ;)

I think the only REIT in Singapore that owns 100% freehold real estate is Saizen REIT which, according to your train of thought, should present the best value in the S-REIT universe, ceteris paribus. ;-)

Anonymous said...

Yea...Saizen Real yield will be similar to its historic yield (which is around 7%).

The historic yield for industrial REITs are quite similar...and since their asset life-span is similar, I guess their real yield is close.

But with regards to office REITs, I brief look at CCT portfolio, I can see most of their lease got at least 9 decades worth of life in them. So I guess the their real yield will be at similar levels to the industrial reits.

Actually it is quite interesting - the real yield is always lower than the historic yield unless the asset is freehold or the Trust is retaining income to renew it.

Lets take a look at AIMS real yield. It is not easy since its revenue will fluctuate over the next few years. But assuming it remains the same ->

Annual cash-flow: $31.5 million
Asset: $660 million
Net Debt: $160 million
Life-span: 43 years
Market Capitalization (based on pre-rights price of $0.22): $322.6 million

So the real cash-flow is (31.5 X 43) - $160 - $322 = $0.872 billion

Hence the annual real yield is 6.3%. So if I am comparing AA REIT with a similar industrial REIT with freehold assets, I will use this benchmark as a guide.

Nick :)

AK71 said...

Hi Nick,

Thank you for sharing the details. Much obliged. So, I suppose you would be buying some units of Saizen REIT in due course? ;-p

Just as an aside, actually, even if half of AA REIT's land lease expires 40 years from now, it's probably ok for me. Why? Well, at a yield of 10% per annum, I would have recovered my investment in 10 years and the balance is pure profit, ceteris paribus.

I could possibly be six feet under by then as well. ;p

mark said...

Using rule of 72, if the yield is 10% (and assumes to remain the same indefinitely), shouldnt it be 7.2 years where you would have received your capital? This does not take into consideration the appreciation or depreciation of the share price.

AK71 said...

Hi Mark,

I am not familiar with this rule of 72. So, I did a Wiki:

"In finance, the rule of 72, the rule of 70 and the rule of 69 are methods for estimating an investment's doubling time. The number in the title is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling."

The crux is this:
"These rules apply to exponential growth and are therefore used for compound interest as opposed to simple interest calculations."

So, unless we reinvest the 10% yield every year and make 10% on that 10%, this rule does not work.

Thanks for this comment. I learned something tonight. :)

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