Singapore REIT Bonds: Two Higher-Yielding Investment Strategies

• As of 29 Jan 16, there are approximately 53 SGD-denominated bonds issued by Singapore REITs, totalling S$6.875 billion in principal value; yields on Singapore REIT bonds currently range between 1+% to 5%
• A key recent change for the sector is the proposed implementation of a 45% regulatory gearing limit on the sector, from the 35%/60% limits for REITs without/with a credit rating; this should help to keep REIT leverage in check
• For investors looking at higher-yielding investments in the Singapore REIT bond space, two investment approaches should be considered:
1. Consider perpetual bonds
2. Look amongst the higher-yielding bonds issued by smaller REITs  

The Singapore REIT bond market

As of 29 January 2016, there are approximately 53 SGD-denominated bonds outstanding in the Singapore REIT space represented by 20 REIT issuers, totalling S$6.875 billion in principal value. Yields range from 1.78% for SUNSP 3.100% 08Aug2016 Corp (SGD)s which have a short remaining tenor, to around 5% for LMRTSP 4.500% 23Nov2018 Corp (SGD)s.

Leverage of sector to be kept in check

A key recent change for the sector is the proposed implementation of a 45% regulatory gearing limit on Singapore REITs, an increase from the 35% limit currently although the CIS code previously allowed for REITs to increase gearing to 60% if they receive and maintain a credit rating (from Moody’s, S&P or Fitch). While the proposed single-tier 45% gearing limit is marginally higher than the 35% current limit, this should help to keep leverage of the sector in check. A check on 31 Singapore-listed REITs indicates that leverage ratios are largely within the 45% limit at this juncture (see Table 1).

Table 1: Singapore REIT gearing levels

But alternative financing to increase in relevance

However, investors should note that REITs have the ability to issue "hybrid" securities, like subordinated perpetual securities which will be classified as equity rather than debt, which leaves them out of the aggregate leverage computation, as prescribed by the CIS code draft legislation. Conditions for such qualifying "hybrid" securities include them having i) a perpetual term, ii) redemption being at the sole discretion of the REIT, iii) non-cumulative distributions, iv) the absence of an interest rate step-up, as well as v) the securities being "deeply subordinated" in the event of liquidation.

On one hand, this allows for REITs to increase their actual interest-bearing liabilities without breaching the gearing limit; on the other hand, the increasing relevance and issuance of such securities means that investors should see more higher-yielding alternatives in the Singapore REIT bond space.

For investors currently looking for higher yields in the Singapore REIT bond sector at this juncture, we suggest two investment approaches:

1. Consider perpetual bonds

Higher yields for subordinated debt of REITs

As discussed above, "hybrid" securities accord REITs with more flexibility in financing, given that such securities are not included in the MAS-stipulated leverage calculation. While the subordinated nature of such securities (and the absence of a known maturity date) may be negatives for investors, buyers of such bonds are compensated with higher yields. In addition, coupon rates on the bonds (shown in Table 2) reset every 5 years (the bonds have their first call dates 5 years after issuance), which means that even in the unlikely event of non-call (usually under the assumption that interest rates rise substantially), investors can still benefit from a coupon reset based on a higher prevailing interest rate.

The availability of perpetual bonds in the Singapore REIT bond market allows investors to gain credit exposure to larger REITs like Ascendas REIT, Keppel REIT or Ascott Residence Trust, and yet still achieve yields in excess of 4.5% (based on ask yield-to-worst figures).

Table 2: Subordinated perpetual REIT debt

As an example, AREIT 4.750% Perpetual Corp (SGD)s are currently quoted at around 4.58% YTW, and sport a Baa2 rating (from Moody’s), two notches below Ascendas REIT’s issuer rating of A3. Mapletree Logistics Trust’s MLTSP 5.375% Perpetual Corp (SGD)s are also rated two notches below the issuer’s Baa1 rating (Baa3 for the bonds).

Ascendas REIT perpetuals mispriced?

At this juncture, there appears to be a bit of mispricing within the Singapore REIT perpetual bond space – amongst the three bonds which have between 4.4 and 4.8 years to call (AREIT 4.750% Perpetual Corp (SGD) , ARTSP 4.680% Perpetual Corp (SGD), and KREITS 4.980% Perpetual Corp (SGD)), yields are fairly similar, with the bonds sporting yields between 4.58% to 4.85% (on an ask yield-to-call basis). However, we note that while only Ascendas REIT’s AREIT 4.750% Perpetual Corp (SGD)s are rated (at Baa2), the two notch lowering of ratings accorded by Moody’s on subordinated perpetual REIT debt means that the implied ratings on Ascott Residence Trust’s and Keppel REIT’s perpetual bonds are Ba2 and Ba1 respectively, which would place both in non-investment grade territory. Yet, prevailing yields on all three bonds suggest that the 2 or 3 notch rating difference (crossing from IG to non-IG) is worth a mere 20-30bps.

Consequently, we think that the investment-grade rated AREIT 4.750% Perpetual Corp (SGD)s are attractively priced versus the peer group, while offering investors exposure to the credit of Singapore’s second-largest REIT (at around S$5.83b in market capitalisation). Ascendas REIT also sports a "blue chip" sponsor (and major unitholder) in the Ascendas Group, a member of the recently formed Ascendas-Singbridge group.  

2. Look amongst the higher-yielding bonds from smaller REITs

"Bullet" bonds from smaller REITs

For investors who don’t like the idea of buying perpetuals due to maturity uncertainty, fixed maturity "bullet" bonds issued by smaller Singapore-listed REITs can still offer decent levels of yield. In this segment, REITs which have yields in excess of 4% (based on ask YTMs) include LippoMalls Indonesia Retail Trust, Sabana Shari'ah Compliant REIT and First REIT.  All three have gearing ratios below the new 45% threshold (based on the latest MAS guidelines), based on the latest available data. We take a closer look at some of the features of each REIT and the bonds available at this juncture.

Table 3: Selected smaller Singapore REITs

First REIT

First REIT is a healthcare REIT sponsored by PT Lippo Karawachi Tbk, and has the majority of its assets in Indonesia (Siloam Hospitals Group’s assets form the bulk of First REIT’s portfolio), while healthcare properties in Singapore and South Korea make up the remainder of the REIT’s assets. A key feature of First REIT is the impressive 100% occupancy rate (as of 31 Dec 15) with the REIT’s weighted average lease expiry at 10.8 years – the first renewal is only up in 2021.

While the REIT’s gearing level is fairly low (at 33.7% as of end-Dec 15), investors may be slightly concerned with currency risk from First REIT’s underlying assets (primarily IDR), although we note that the majority of First REIT’s Indonesian rental income is charged in SGD terms (an unusual arrangement which adds to the stability of cash-flows from an SGD perspective), which minimises the risk of IDR depreciation hurting First REIT’s ability to service debt. FIRTSP 4.125% 22May2018 Corp (SGD)s are currently quoted at 99.50 ask for a YTM of 4.35%, representing a rather decent yield for a short tenor bond (2.3 years to maturity).   

LippoMalls Indonesia Retail Trust (LMIRT)

LMIRT is a retail REIT which sports a similar market capitalisation to that of First REIT (at around S$850m), although it offers "pure play" exposure to Indonesian retail assets. Gearing (debt to assets) at around 35% is similar to that of First REIT, while currency risk is also a concern, given that the REIT’s assets are denominated in IDR. Unlike the usual arrangement for First REIT (where rentals are largely billed in SGD), LMIRT employs currency derivatives to hedge IDR risk from the REIT’s cash-flows, adding a bit of uncertainty to LMIRT’s ability to continue servicing its debt, although investors should note that the REIT received a Baa3 (investment-grade) rating from Moody’s just last year.

Thanks to the non-SGD nature of LMIRT’s assets and cash-flows alongside more muted interest in Indonesian assets, investors now demand yields in the high 4% range for LMIRT’s SGD-denominated bonds; LMRTSP 4.500% 23Nov2018 Corp (SGD)s which have 2.8 years to maturity now offer a 4.9% yield while the shorter-tenor (1.4 years) LMRTSP 5.875% 06Jul2017 Corp (SGD)s are quoted at around 4.6%.  

Sabana Shari'ah Compliant REIT

Other than being Singapore’s first Shari’ah compliant REIT, Sabana Shari'ah Compliant REIT is also the only one amongst the three "smaller" REITs mentioned here to have all its real estate assets located in Singapore – the REIT currently owns 23 Singapore-based industrial properties. Sabana REIT is also significantly smaller than its peers, sporting a S$483m market capitalisation versus the S$800+m for First REIT and LMIRT.

While the REIT’s SSREIT 4.250% 03Apr2019 Corp (SGD)s and SSREIT 4.000% 19Mar2018 Corp (SGD)s are currently quoted at fairly high yields of 4.7% and 4.5% respectively, investors should note the lacklustre 87.7% occupancy rate (as of end-Dec 15), while the 41.3% gearing ratio is also fairly high. Mitigating this is the REIT’s ongoing divestment of two properties which would bring gearing down to 39%, while investors who are concerned about the presence of a credit rating should note that Sabana REIT currently sports a BBB- (investment-grade) rating from ratings agency S&P.