Real estate investment trusts, or REITs, are popular investment choices in the Singapore stock market. That’s because REITs tend to have high dividend yields (technically, a REIT’s dividend is known as a distribution – but let’s not split hairs here!) due to their need to distribute up to 90% of their taxable income to their unitholders in order to enjoy tax transparency.
But, not every REIT would be a good investment. And with around 40 REITs and stapled trusts (trusts that consist of a REIT and a business trust) in our local stock market, it’s important that investors attempt to separate the wheat from the chaff. So, where should we start in our hunt for potential investing opportunities amongst REITs?
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One way I do is to look for REITs with share prices that have fallen hard and in this article, I want to explore three REITs that fit that description. They are: CapitaLand Retail China Trust (SGX: AU8U), First Real Estate Investment Trust (SGX: AW9U), and Frasers Hospitality Trust (SGX: ACV). You can see from the table below that the trio’s unit prices have all fallen by double-digit percentages from their respective 52-week highs.
Source: S&P Global Market Intelligence
CapitaLand Retail China Trust, as a quick introduction, is a REIT that owns shopping malls in China. Its portfolio currently consists of 11 malls in Beijing, Shanghai, Guangzhou, Chengdu, Wuhan, Hohhot, and Zhengzhou.
In its latest earnings update, for the second quarter of 2018, CapitaLand Retail China Trust reported that its gross revenue for the quarter had declined by 4.6% year-on-year to S$56.3 million, while net property income was reduced by 5.9% to S$37.6 million.
The lower net property income was due to the sale of CapitaMall Anzhen on 1 July 2017 and lower contributions from CapitaMall Grand Canyon and CapitaMall Minzhongleyuan. Contributions from Rock Square, which is accounted for under the share of results (net of tax) from joint ventures, helped provide an offset. So despite reporting lower net property income, CapitaLand Retail China Trust’s distribution per unit (DPU) for the quarter inched up by 0.8% year-on-year to 2.64 cents.
As of 30 June 2018, the REIT’s gearing stood at 32.1%, which is comfortably lower than the regulatory gearing limit of 45%. Meanwhile, its committed occupancy rate was at an acceptable 97.4%.
In its latest earnings update, CapitaLand Retail China Trust gave the following useful comments on its outlook and the state of the China retail market:
“In 2Q 2018, China’s GDP registered a stable growth of 6.7%1 year-on-year to RMB41.9 trillion, signifying a good momentum for 2018 as the national economy moves towards high-quality development. National retail sales increased 9.4% year-on-year to RMB18 trillion, while national urban disposable income and expenditure per capita grew 8.7% and 6.8% respectively.
China’s retail landscape is decentralising as new retail zones are created to cater for developing residential areas. In 1Q 2018, new retail supply slowed with a total of 780,000 sqm of new stock added whereby more than 80% was located in submarkets or emerging areas.
Notwithstanding the short-term volatility arising from current political sentiments, CRCT’s portfolio of family-oriented malls remains well-positioned to tap on continued urbanisation, China’s transition towards a consumption-based economy, as well as the rising affluence of a growing middle-class segment and higher-spending millennials.”
Next up is First REIT, which is focused on healthcare assets in Asia. It currently has a portfolio of 20 properties (16 in Indonesia, three in Singapore, and one in South Korea) that are mostly hospitals and nursing homes. The REIT’s sponsor is Indonesia’s largest listed property company, PT Lippo Karawaci Tbk.
First REIT’s latest earnings update was for the second quarter of 2018. During the quarter, the REIT’s gross revenue increased by 5.3% year-on-year to S$28.92 million, while its net property income improved by 5.0% to S$28.50 million. The higher top-line resulted in the REIT’s distributable amount climbing by 1.6% to S$16.91 million. Consequently, First REIT’s DPU inched up by 0.5% to 2.15 cents.
The improvement in First REIT’s results was primarily due to new contributions from Siloam Hospitals Buton, Lippo Plaza Buton, and Siloam Hospitals Yogyakarta, which were all acquired in the fourth quarter of 2017. Higher rental income from First REIT’s existing properties also played a role.
As of 30 June 2018, First REIT’s gearing stood at 34.2%, which is also a fair distance from the regulatory gearing limit. The REIT’s committed occupancy rate remained outstanding at 100%.
Here’s a useful piece of commentary on First REIT’s prospects that the REIT gave in its latest earnings update:
“Indonesia’s gross domestic product grew 5.06%1 year-on-year in the first quarter of 2018, at a slower pace compared to the previous quarter, due mainly to sluggish consumption. To reduce reliance on domestic consumption, the Indonesian government has implemented several deregulation measures to attract more investment. Last year, Indonesia recorded 8.5% more foreign direct investment in Rupiah terms than in 2016. On the other hand, rising interest rates in the US have weakened the Rupiah in recent weeks, causing Bank Indonesia to raise interest rates to support the Rupiah. However, this has no impact on the Trust’s borrowings as its loans are originated in Singapore and denominated in Singapore dollars.
BMI Research reported that healthcare spending in Indonesia amounted to Rp403.9 trillion in 2017 and projects it to rise to Rp1,224 trillion by 2027, and that healthcare spending per capita will more than double between 2017 and 20273 . Against this trend, together with the growing nationwide adoption of the national health insurance scheme, private healthcare demand will continue to rise. As such, First REIT remains well-positioned for further growth, with a strong acquisition pipeline of around 40 hospitals in Indonesia from its Sponsor, PT Lippo Karawaci Tbk.”
Investors may want to note that OUE Lippo Healthcare Ltd (SGX: 5WA) announced in mid-September that it is looking to acquire a 10.63% stake in First REIT. OUE Lippo Healthcare also intends to buy a 40% stake in Bowsprit Capital Corporation Limited, First REIT’s manager. The remaining 60% will be purchased by OUE Lippo Healthcare’s parent, OUE Ltd (SGX: LJ3). First REIT’s sponsor, Lippo Karawaci has close ties to the two OUE entities.
Lastly, there is Frasers Hospitality Trust, which is a stapled trust that comprises a real estate investment trust and a business trust. It focuses mainly on hotels and serviced residences around the world. Right now, its portfolio consists of 15 properties located across nine cities in Asia, Australia, and Europe
For the quarter ended 30 June 2018, the trust’s gross revenue declined by 1.8% year-on-year to S$38.2 million while its net property income (NPI) fell by 2.8% to S$28.5 million. The declines were primarily due to challenges in Australia and Kuala Lumpur. For the former, Frasers Hospitality Trust experienced softer corporate demand; for the latter, there were “consequential pullbacks in business and government spending leading up to and after the Malaysia general election.”
Ultimately, Frasers Hospitality Trust’s distribution per stapled security (DPS) came in at 1.1226 Singapore cents, 9.3% lower than a year ago. As at 30 June 2018, the trust had a gearing ratio of 34.0%, which is a safe distance from the regulatory gearing ceiling of 45%.
Singapore and Australia accounted for 35% and 33% of the trust’s portfolio value, respectively, as of 30 June 2018. In its latest earnings update, here’s what Frasers Hospitality Trust shared about the outlook for its business in the two key markets:
“Singapore Tourism Board (STB) reported a yoy growth of 6.9% in visitor arrivals for the first five months of 2018. China and Indonesia were the top source markets for tourism, accounting for 35.3% of total visitor arrivals. In the near term, hotel demand is expected to remain strong due to continued arrivals growth while limited hotel supply should reduce supply-side pressure. Hotel trading performance is anticipated to pick up in 2H2018. Increased marketing efforts by STB and the positive outlook in Asia-Pacific tourism should continue to drive visitor arrivals growth.
Tourism Australia reported a yoy increase in international arrivals of 6.1% for the first five months of 2018, with Chinese visitors growing by 10.5%. A relatively large number of new rooms is anticipated to enter the Sydney market over the next three years but continued strong demand is expected to offset the supply increase. Stable occupancy and anticipated increases in ADR are likely to continue to support RevPAR growth in the city. The Melbourne hotel market, on the other hand, is expected to stay muted. Room rate growth has been hard to come by and with a glut of new supply in 2018 and 2019, this is anticipated to remain the case for some time.”
As for Malaysia, one of Frasers Hospitality Trust’s troubled markets in the reporting quarter, here’s what it had to say regarding its prospects in the market:
“Despite tourist arrivals declining 3.0% yoy to 25.9 million, tourist receipts still inched up 0.1% to RM82.2 billion last year. Tourism Malaysia targets to achieve 33.1 million tourist arrivals and RM134 billion in tourism receipts for 2018. It reported a yoy decline of 3.4% in tourist arrivals for January to April 2018. In Kuala Lumpur, hotel room rates are expected to remain stagnant in the near future, in view of the new room supply that has entered the market since last year. This would deter the existing hotels from raising their rates in order to stay competitive.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommendations for CapitaLand Retail China Trust and First Real Estate Investment Trust.