S-REIT sector not attractive?

I read that JPMorgan says "valuations are no longer compelling as S-REITs are trading at a forward dividend yield of 6.0%, P/B of 1.1X and 7.5% premium to house NPV estimates."


JPMorgan singled out 2 REITs for comment:

Cuts CapitaCommercial Trust to Underweight vs Neutral on lack of growth, deteriorating portfolio quality and rich valuation. 
 

Cuts CapitaMall Trust to Neutral vs Overweight "as we believe that constant cash calls from the sector would put pressure on the stock."

I am vested in neither one. As with stocks, there will be better counters to be vested in and the ones to avoid. Broader strategy towards S-REITs stays the same for me. Stay vested in S-REITs with higher yields, trading at a discount to NAV and with relatively low gearing.

S-REIT valuations no longer compelling - JPMorgan
Wednesday, 12 January 2011

© 2011 - The Edge Singapore

Office S-REITs VS Industrial S-REITs.

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:
FCOT, CCT and K-REIT.
AIMS AMP Capital Industrial REIT: Rights issue.
Mapletree Log: Acquires properties in Japan.

FCOT, CCT and K-REIT.

I got a SMS from the blog master of Time to Huat as I was on my way home. FCOT's volume surged as price action formed at nice white candle, closing at 15.5c, overcoming a many times tested resistance at 15c.

Buy signal seen on the MACD histogram, higher low formed on the MFI, OBV spiked and RSI rose into overbought territory. Momentum is positive, demand is strong, accumulation is strong and buying momentum is positive but it could be overdone.

Any reason for the optimism in FCOT? I did not see any announcement by the management which could have resulted in such an upmove in price today. Should we buy some? Could it go higher in price?  From a technical perspective, it does look promising.  Volume is, after all, the fuel that drives rallies and today's volume was impressive.

Let us look at the fundmentals:

FCOT's NAV/unit stands at 26c.  If all the CPPUs were converted, NAV/unit would be 25c. So, at a price of 15.5c, FCOT's units are trading at a 40% discount to NAV.  That's pretty steep.

Gross borrowings as a percentage of total assets (aka the gearing level) is at 40.4%. This is rather high and there is limited room to leverage up for any yield accretive purchases.  However, the 342,500,000 CPPUs have a conversion price of S$0.2369 per unit.  This would bring down its gearing level marginally and give FCOT more capital (S$81.138m) to fund yield accretive purchases in future in case all CPPUs were converted. 

The 3Q DPU was 0.25c. So, the annualised DPU should be about 1c. Based on today's closing price of 15.5c, the yield is 6.45%.  This is not very attractive if we were to compare to what we could get from AIMS AMP Capital Industrial REIT, for example.  Of course, these two REITs are in different real estate sectors.  Let us compare FCOT with CCT and K-REIT instead. 

CCT closed at $1.47 today. NAV as of 30 Jun 10 at $1.36. CCT is trading at a 8% premium to NAV. Gearing ratio is at 32.8%.  Plenty of room to leverage up for further yield accretive purchases. 1H DPU was 3.9c.  So, the annualised DPU should be about 7.8c.  This means a yield of 5.3% based on today's closing price. The yield might be lower than FCOT's but CCT has a much stronger balance sheet.

K-REIT closed at $1.31 today. NAV as of Jun 10 at $1.47. K-REIT is trading at an 11% discount to NAV. Gearing ratio is at 15.2%.  This is very attractive to me as it gives the REIT plenty of room to leverage up for potential yield accretive purchases. 1Q 2010 DPU at 1.33c.  Annualised DPU should be 5.32c which means a yield of only 4% based on the current price of $1.31.  K-REIT has, arguably, the strongest balance sheet amongst the three office property REITs discussed here.  The low yield might put off investors but its low gearing paves the way for future acquisitions which could bump up its DPU.

I have told my friends before that for me to buy more units in FCOT, it has to offer me a much higher yield. The much higher gearing and lower quality assets compared to CCT and K-REIT are justifications. There is also greater safety in CCT and K-REIT as their interest coverage ratio (ratio of year‐to‐date earnings before interest, tax, depreciation and amortisation to interest expense) are at 3.8x and 3.6x respectively while FCOT's ratio is at 2.74x.  There is little doubt that FCOT's fundamentals are the weakest of the three. So, naturally, a higher yield is necessary to compensate for higher risk.

See FCOT's presentation slides here.
See CCT's presentation slides here.
See K-REIT's presentation slides here.