2 Growing REITs That Are Trading Well Below Their Peaks

With interest rates rising, real estate investment trusts (REITs) faced a steep sell-off earlier this year. This has resulted in comparatively lower prices and higher distribution yields. Investors often assume that when interest rates rise, REITs’ unit prices will suffer due to higher borrowing costs and investors flocking to other higher-yielding assets.

However, we should also note that when interest rates rise, it is usually because the economy is growing. Today most REITs in Singapore still trade well below their peaks and boost yields higher than before.

Historically, it is also true that buying REITs right after a sell-off is likely to result in outperformance over the longer term. This is especially so when sell-offs are due to interest rate fears rather than underlying poor rental yield on the properties. At the same time, not all REIT face similar sell-offs, and not all will recover with the same vigour.

With that in mind, I have identified two REITs in Singapore that are trading well below their peaks and yet, are likely to increase their distributions per unit going forward.

CapitaLand Retail China Trust (SGX: AU8U)

This China-focused REIT invests primarily in shopping malls in China. As of 30 June 2018, the trust had 11 shopping malls in its portfolio, including the recently acquired Rock Square. The REIT has had a good record of earnings growth and in the most recent quarter, increased its distribution per unit (DPU) by 0.8% to 2.64 cents.

It also has a robust balance sheet with a gearing (debt versus asset value) of 32.1%, well below the 45% regulatory limit and a safe interest cover (net property income divided by interest expense) of 5.9 times. Both these metrics mean that the REIT continues to have the financial capacity to make more debt-funded acquisitions in the future to boost DPU.

Only 0.2% of debt is due this year, and 25% is due next year, which the management is already looking to refinance. In addition, 80% of the total debt is hedged at a fixed rate.

The REIT has a strong line-up of properties that have consistently appreciated in value. Over the last six months, its portfolio value has increased by 1.2%, and the capitalisation rate is a healthy 5.8%. More importantly, in the last quarter, rental reversion rate was positive at 10.5%, meaning unitholders can expect higher rental income in the next few quarters.

The trust now trades at S$1.44, which is 14.7% off its peak, giving it a more attractive price-to-book ratio of 0.84 and a distribution yield of 7.03%.

EC World Real Estate Investment Trust (SGX: BWCU)

Like CapitaLand Retail China Trust, EC World is a China pure-play REIT which has a portfolio of seven specialised logistics and e-commerce logistics real estate. Despite its relatively short history as a listed REIT, I believe that it is well placed to continue to reward unitholders with consistently growing distributions.

For one, its leases have built-in step-up rental escalations that provide the REIT with organic rental income growth. Secondly, the trust continues to have a comparatively low gearing ratio of 29.5%, leaving it plenty of debt headroom to make strategic yield-enhancing acquisitions when the opportunity arises.

The REIT performed well in the last quarter, with DPU up 1.9% year-on-year and 6.9% quarter-on-quarter. This was achieved through better foreign exchange rates, better performance by the portfolio, and contribution from its maiden acquisition of Wuhan Meiluote in April this year.

At S$0.70 per unit, EC World REIT trades 11.4% below its peak price. The price translates to a price-to-book ratio of 0.76 and an attractive distribution yield of 8.55%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns units in EC World Real Estate Investment Trust. Motley Fool Singapore has a recommendation for CapitaLand Retail China Trust.