Another round of downward repricing for REITs?

IN our previous piece, we discussed some of the risk factors for real estate investment trusts (REITs) that are listed on the local bourse as well as their prevailing returns compared against the risk-free yields on government bonds.

In this piece, we are taking a closer look at some of the larger REITs and comparing their returns against trusts that are listed in Singapore.

Latest earnings results for the local REITs were mostly in line with expectations, unsurprising. This underscores one of the key attractions of trusts — their relative earnings predictability, even if growth prospects are modest.

Axis REIT giving higher yields after price drop
Among the larger trusts, Axis REIT offers comparatively attractive yields at prevailing prices – since its unit price has seen one of the sharpest declines in the broader sell-off for REITs, falling from an all-time high of RM4.18 (in May 2013) to the current RM2.98.

The trust reported revenue growth of 6.8% to RM142 million for 2013, bolstered by full-year contributions from three properties acquired in the second half of 2012 as well as an average rental reversion of 8.1% for some 14.5% of total leases renewed, in terms of net lettable area (NLA). Income distribution totalled 18.5 sen per unit last year, up 6.9% from 17.3 sen per unit  — if we exclude the additional 1.3 sen per unit one-off distribution of gains from the sale of an asset — in 2012.

Occupancy for its portfolio of 31 assets — valued at a collective RM1.54 billion — remained relatively stable at 94.9%.

Its portfolio’s weighted average lease expiry (WALE) is nearly four years, which should provide a degree of resilience to earnings for the foreseeable future. Just over one-third of total portfolio NLA is up for renewal this year.

Elsewhere, Axis has been migrating part of its RM528 million borrowings — gearing of 33% — to longer dated fixed rate debt, in anticipation of rising interest rates. At end-2013, fixed rate debt accounted for about 60% of total borrowings, up from 38% previously.

To further improve yields, Axis is continuing with asset enhancement activities (AEI) for several of its existing properties. At the same time, it is recycling capital from some of the more mature properties for yield accretive acquisitions. It targets to complete the disposal of Plaza Axis by mid-2014.

Axis was looking at a number of potential properties to acquire through 2013 but did not manage to complete any. However, the chances of the trust finalising some of those deals — worth some RM380 million in total — are high this year. Any new acquisition is expected to lift earnings in 2015.

Meanwhile, gains from the asset sale will be distributed to unitholders this year, equivalent to some 2.37 sen per unit. Added to our forecast earnings, total distribution for 2014 is estimated to total 21.2 sen per unit. This translates into fairly attractive net yield of 6.4%.

Will domestic consumption slowdown damp rental rates?
Among the larger retail-focused REITs, CapitaMall Malaysia Trust (CMMT) and Sunway REIT are expected to offer investors slightly higher yields than Pavilion REIT and IGB REIT at current prices.

However, income growth for Sunway REIT in financial year 2014 ending June 30 (FY14) and FY15 will be modest, dampened by ongoing AEI at Sunway Putra Mall, which has also affected occupancy for the adjacent hotel. Stronger growth is only expected in FY16, after the completion of the AEI.

Positively, the loss of income from Sunway Putra Mall was mitigated by strong earnings from its flagship, Sunway Pyramid Mall. The latter continued to enjoy double-digit rental reversion and high occupancy, of 99%, last year. With a good 60% of NLA renewed in the first half (1H) of FY14, the mall will be buffered, to a certain degree, against a slowdown in domestic consumption and any resulting pressure on future rental rates.

Sunway Pyramid Mall and the retail segment contributed to approximately 59% and 69% of total portfolio revenue in 1HFY14 respectively.  The hotel and office properties — which account for roughly one-quarter of total revenue — remain vulnerable to slower economic activities as well as rising costs and competition.

CMMT is a “purer” retail REIT with a portfolio of four shopping malls, valued at a collective RM3.08 billion. Last year, all of the malls recorded positive revenue and income growth, though Sungei Wang Plaza saw negative rental reversion. Still, rental reversion for the portfolio averaged 7.5%.

Growth will most likely be organic in nature in the near to medium term. Some 41.7% of leases, in terms of

rental, are due for renewal this year. As mentioned above, we could see some dampening effect from the expected slowdown in domestic consumption on the quantum of rental increase.

CMMT is progressing to phase 2 of AEI works at the East Coast Mall, which includes the reconfiguring of existing areas and conversion of parking lots into additional retail space. Some 8,000 sq ft of retail space was created under the first phase, which was completed end-2013.

Exposure to higher interest rates is moderate given that 73% of total borrowings of RM911 million — gearing at 29% — are fixed rate with the next major maturity only in 2016.

CMMT is expected to give a net yield of roughly 6% at the prevailing price of RM1.37.

Unattractive yield spreads compared with S-REITs
Whilst Axis REIT, Sunway REIT and CMMT are currently offering the highest yields among the larger capitalised trusts on the local bourse, their spreads against the risk-free government bonds are quite small at roughly 1.5% to 2.2%. The yield spreads for Pavilion REIT and IGB REIT are even lesser at 1.3%. This translates into greater  risks of a further fall in unit prices when interest rates start to rise.

By comparison, the larger industrial REITs in Singapore such as Ascendas REIT and Mapletree Logistic Trusts are giving estimated net yields of 6.8% to 7.3%, which is some 4.4% to 4.9% above the prevailing benchmark Singapore government bond yields.

Similarly, larger retail-focused trusts such as Capita Mall Trust and Fraser Centerpoint Trust are yielding roughly 6.1% to 6.8% or equivalent to a yield spread of about 3.7% to 4.4% over risk-free returns.


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 February 12, 2014.