The fastest way for real estate investment trusts (REITs) to reward unitholders with increasing distributions is through acquisitions. A prudent acquisition can help increase distribution per unit (DPU) much faster than organic growth in rents.
With that in mind, I did a little digging to find REITs within Singapore that were best-positioned to make yield-accretive acquisitions in the future.
In my research, I screened for REITs that had access to cheap debt (preferably below 3%) and had low gearing ratios (preferably below 33%). Here are three of the top REITs I found that fit that criteria.
1. Ascott Residence Trust (SGX: A68U)
Sponsored by property giant, CapitaLand Limited (SGX: C31), Ascott Residence Trust is in a great position to continue making yield-accretive acquisitions. As of 30 June 2019, the REIT (which has a portfolio valued at S$5.5 billion) had a gearing ratio of 32.8% and an effective borrowing cost of 2.1%. It is also heartening to note that 88% of its debt is on a fixed rate, which means the REIT is less likely to suffer an increase in interest rates in the future.
Its current gearing ratio gives it a debt headroom of S$1.1 billion before it hits the 45% regulatory ceiling. Ascott Residence Trust recently announced that it is in the midst of finalising its merger with Ascendas Hospitality Trust. This is in line with CapitaLand’s strategy to consolidate its assets, following its acquisition of Ascendas-Singbridge earlier this year.
2. SPH REIT (SGX: SK6U)
SPH REIT, which owns three retail properties in Singapore and one in Australia boasts one of the lowest gearing ratios among REITs listed here. As of 30 June 2019, the REIT had a gearing ratio of 30.1% and a cost of debt of just 2.89%.
The REIT finally flexed its financial muscle in recent years when it acquired The Rail Mall and Figtree Cove Shopping Centre. Despite the recent acquisitions, its low gearing and cost of debt still put it in a great position to continue making acquisitions.
3. Frasers Commercial Trust (SGX: ND8U)
Completing this list is Frasers Commercial Trust which has a gearing of 29.3% and an average borrowing rate of 2.96%. The REIT, which owns six properties located across Singapore, Australia and the UK, has 90.2% of its debt secured at fixed rates, which provide it with the assurance that its interest expense will not increase until the loans need to be refinanced.
Besides organic growth, Frasers Commercial Trust could also see an organic rental increase. Around 47% of its 2019 leases have built-in annual step-up rent escalations that provide visible rental income growth over the next few years.
A unique case
A special mention must go to CapitaLand Retail China Trust (SGX: AU8U), which has a fairly low gearing of 33.8% and boasts the lowest cost of debt for China-focused REITs.
Its average cost of debt stood at just 2.99% as of 30 June 2019. Its cost of debt compares favourably against other China-focused REITs who have an average cost of debt of 4.68% between them. This puts it in a much better position to source for acquisitions that can boost its DPU.
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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 doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended the shares of CapitaLand Retail China Trust and CapitaLand Limited.