3 High Quality S-REITs to consider, now that interest rates have stabilised

The Federal Reserve has just paused the interest rate hike in June 2023 and I think it’s time to look at some Singapore REITs.

Here’s why.

The Fed pauses rate hike, but…

As analysed on my latest Finbite, the Fed had paused the rate hike in June 2023. However, they have also signaled that future hikes are still in the works. 

Based on the votes by the Federal Reserve committee, it seems that they are expecting interest rates to go up to about 5.5%, till the end of 2023.

This means there’s still room for a further rate hike of about 0.25% to 0.5%. And this is likely to take place in the upcoming FOMC meetings in July or November this year.

For a deeper analysis of the latest rate hike situation, read this.

But let’s address the other elephant in the room:

What if the US floods the market with Treasury Bonds?

The US Debt ceiling has been suspended till 2025. And analysts predict that the market could be flooded with treasury securities valued at over $1 trillion this year.

This could lead to interest rates rising, impacting stocks, bonds, crypto, USD and more.

And you might be worried that there could be more downside in the near future. 

In my opinion, the impact may not be as bad as it sounds. 

In the past 10 over years the Federal Reserve has been printing a lot of money such that the Fed assets have ballooned to $8 trillion. So, even if the analysts are spot on with their $1T expectation, there’s more than enough liquidity in the market to withstand it.

Interest rate risks have more or less stabilized

So, while there may be fluctuations in the interest rate, it is more or less stabilized. And it is also clear that we are very close to the peak interest rate. 

With this clarity, I think it could be time to start looking at S-REITs.

Why Singapore REITs?

In recent years, S-REITs were badly hit by rising interest rates. 

As you can see, the iEdge S-REIT Leaders Index experienced a big drop in 2020 due to Covid and another drop in 2022 when the rate hikes took place. 

At the point of writing, we are once again close to the 5-year low. So, if you had missed the Covid lows, and last year’s lows, this could be the third (and possibly last) chance to look for undervalued opportunities in S-REITs.

To top it off, S-REITs have been beaten down but have yet to recover much. This means that we might still have a chance to potentially find some gems at a great bargain.

3 high quality SREITs to consider now

Disclaimer: not financial advise, do your own research before deciding if these are for you.

1) Keppel DC REIT (AJBU)

Keppel DC REIT is a data center REIT which is a specialty REIT. Not every building can become a data center; it does need some special knowledge in order to manage this set of properties.

What I like about Keppel DC REIT is that the majority of the properties are located in Singapore.

Singapore is a better land scarce area and we cannot afford to build a lot of data centers unlike other countries. At the same time, Singapore is a key connectivity hub in Asia Pacific. 

This means that data center real estate is very valuable. In fact, it is not easy to establish new data centers in Singapore as we have other land demands. 

Hence, Keppel DC REIT’s portfolio of data centers in Singapore is a competitive advantage.

• High Occupancy

As shown in the image above, Keppel DC REIT has a high occupancy rate at 98.5%. And they have a long lease duration of about 8.2 years.

This means that Keppel DC REIT’s rental income will be stable in the coming years. 

• Impressive 1Q23 earnings

Despite the economic slowdown, Keppel DC REIT was able to grow both its distribution income and distribution per unit.

Their ability to keep increasing value and growing despite being in the worst of times is a good sign.

• Strong track record

Keppel DC REIT was listed about 9 years ago and has delivered a total return of 215.98% or a CAGR of 14% since. 

Investors were not only rewarded with consistent dividends, but also saw a growth in the dividends distributed over the years. 

Another encouraging signal is that Keppel DC REIT did not slash their dividends at all even during the Covid period. Their business is resilient and was not affected by the pandemic. And going forward, the need for data center will likely increase as it will play an important role in the new economy. 

• Keppel DC REIT Valuation

When valuing REITs, I use Price to Book (PB) as their main assets are their underlying properties. 

This is Keppel DC REIT’s PB ratio over the past 5 years: 

When the price to book ratio is at the -1 standard deviation, it is undervalued. And currently, Keppel DC REIT is trading near its 5 year low.

I believe that the share price had probably priced in the impact of the rate hike since last year and it is still a good opportunity for investors to look.

2) MapleTree Industrial Trust (ME8U)

MapleTree Industrial Trust (MIT) is a blue chip stock that also owns data centers. 

In fact, more than half of its property portfolio is data centers. The other ~40% are industrial properties in Singapore, which makes it more diversified than Keppel DC REIT. It is also giving slightly higher dividend yield compared to Keppel DC REIT at the point of writing.

MIT was hit recently because one of its tenants had gone bankrupt. The tenant in question happened to be MIT’s 3rd largest tenant which caused quite a scare. 

However, if we take a look at MIT’s tenant list, the bankrupt tenant only contributed about 3.2% to MIT’s rental revenue. Hence, the overall impact isn’t that bad. Even if this tenant was wiped out completely, the impact would only be 3.2%.

Having a wide tenant spread, MIT’s risk of being affected by a ‘bad’ tenant is relatively low. And this is what you’ll want to look out for in REITs.

• Strong track record too

MapleTree Industrial Trust has done well over the past 10 years as well, delivering a total return of ~200% at a CAGR of ~12%.

It has also delivered consistent dividend growth. Although there was a slight dip in its DPU, that was probably because MIT had distributed more dividends in 2022 than expected.

Overall, its dividend growth trajectory is still on track. I don’t think that they have any big issues in terms of occupancy or revenue either.

• MapleTree Industrial Trust Valuation

Let’s take a look at MIT’s historical PB ratios:

Again, its PB ratio is below the -1 standard deviation which suggests that it is currently undervalued.

3) MapleTree Logistic Trust

MapleTree Logistic Trust (MLT) is another blue chip stock that focuses on warehouses. It is likely that e-commerce and cross-border transportation will remain crucial and critical in the new economy and MLT will likely benefit.

Unlike Keppel DC REIT and MIT, MLT’s portfolio more geographically diverse:

This makes sense for MLT’s business and also offers an investment option with lower geographical risk. 

• High Occupancy

MLT’s occurrence rate is close to 100% across all the countries too:

This could be due to a combination of factors such as the increase demand from e-commerce as well as having competent management that is able to find properties in good locations, enhance value and retain tenants.

• Strong track record as well

MapleTree Logistic Trust has delivered a total return of 165% over the past 10 years, at a CAGR of ~10%. 

Its dividend growth has also been consistent.

• MapleTree Log Trust’s Valuation

Let’s take a look at MLT’s historical PB ratios:

It is also undervalued based on its historical PB ratio.

This may not be the bottom but…

It would not be fair if I only talked about the upsides. 

Truth is. no one knows if this is a market bottom. Prices may go down further. 

So, remember to be more prudent and conservative. Don’t go all in with your capital at once. Consider dollar cost averaging, so if the prices go lower, you can buy more. 

Not all REITs are equal

At this point, I would not go for high yield REITs yet as they are likely priced for risk. 

Although the high quality REITs I’ve listed offer relatively lower yields at 5 – 6%, they would make relatively better long-term investments as they have the propensity to grow their distribution per unit. Their management have also proven their worth with a well-managed property portfolio which likely would continue to grow in the coming years. 

Hence, I think investors will find more comfort in holding them over a longer period.

I share all these and more in this video too 👇