While investors are aware of the adverse impacts of higher borrowing costs on the sector, it is also important not to blow the issue out of proportion.
With the share prices of many REITs declining by double-digit percentages this year, it’s safe to say that the impact of higher interest rates has already been priced in.
From another perspective, depressed prices provide attractive opportunities for dividend investors to pick up high quality REITs at a discount.
As long as the REITs within your portfolio are well capitalised and have strategies to buffer their distribution per unit (DPU) against rising interest rates, you should be confident that they can emerge stronger.
Here are three REITs with a robust portfolio that can weather the bleak economic conditions.
Capitaland Ascendas REIT (SGX: A17U)
Capitaland Ascendas REIT, or A-REIT, owns a total of 226 properties worth S$16.5 billion as of 30 September 2022.
The oldest industrial REIT’s portfolio spans three segments, namely Business Space & Life Sciences, Logistics, and Industrial & Data Centres segments.
Its investment properties are spread across Singapore, The US, Australia & the UK/Europe.
78% of its total debt is hedged to fixed interest rates, which help to buffer against a sharp increase in financing costs.
Thanks to its strong sponsor CapitaLand Investment Limited (SGX: 9CI), A-REIT also enjoys a low weighted average annualised interest rate of 2.2%.
No more than 15% of the REIT’s total borrowings comes due in any given fiscal year.
Moreover, aggregate leverage is healthy at 37.3% and interest coverage ratio is also reasonable at 5.9 times.
It’s also helpful to see the REIT quantifying the impact of higher interest rates on its DPU.
Every 0.50 percentage point increase in interest rates is expected to result in a decline of S$0.0017 in DPU.
To curb rising inflation, the US Federal Reserve has hiked interest rates by 0.75 percentage points over four consecutive sessions.
The 3% increase in interest rates (i.e. 0.75% x 4) will result in a decline of S$0.0102 in DPU, or a 6.7% decline in fiscal year 2021 (FY2021) DPU.
Given the inflationary environment we have been stuck in since the start of the year, it will not be surprising to see yet another rate hike from the Federal Reserve.
If we project interest rate hikes to increase further to 3.5% (i.e. another 0.5 percentage point increase), this will result in a 7.8% drop in FY2021 DPU.
While the magnitude of DPU decline is not to be taken lightly, A-REIT can mitigate this impact with asset enhancement initiatives (AEI), positive rental reversion and redevelopment projects.
Mapletree Industrial Trust (SGX: ME8U)
Mapletree Industrial Trust, or MIT, is an industrial REIT with 85 properties in Singapore and 56 properties in the US as of 30 September 2022.
The REIT has an asset under management (AUM) of S$8.9 billion as of 30 September 2022.
MIT has locked in 74.2% of its loans on fixed rates, with a weighted average debt tenor of 3.5 years.
It also has a well spread out debt maturity profile, as around 70% of its debt will be maturing during the three years from FY25/26 to FY27/28.
As of 30 September 2022, the cost of borrowing stood at 2.9%.
Furthermore, aggregate leverage is healthy at 37.8% while the interest cover ratio is at 5.2 times.
Management has announced that a 0.50% increase in interest rates will lead to a 0.8% decline in DPU in the quarter ended 30 September 2022 (2QFY22/23).
Therefore, the 3% increase in interest rates will result in the DPU declining by 4.8%.
In the scenario where interest rate hikes rise further to 3.5%, this will result in a 5.6% drop in DPU.
Such a decline is relatively muted, proving that MIT is well protected from the adverse impact of rising interest rates.
The REIT also plans to release S$6.6 million of tax-exempt income over the next three quarters to further mitigate the effects of rising costs.
This move will help to cushion the DPU decline for unitholders.
CapitaLand Integrated Commercial Trust (SGX: C38U)
CapitaLand Integrated Commercial Trust, or CICT, owns a diversified portfolio spanning both retail and office properties.
The REIT has an AUM of S$24.2 billion as of 30 September 2022.
No more than one-fifth of the REIT’s total debt comes due in any given fiscal year and the average cost of debt is relatively low at 2.5%.
Meanwhile, the percentage of borrowings based on fixed interest rates remains high at 80%.
As of 30 September 2022, CICT’s aggregate leverage was at 41.2% while interest coverage ratio stood at 3.9 times.
CICT’s trailing 12-month (TTM) DPU amounted to a total of S$0.1044.
CICT has communicated that a 1% increase in interest rates will lower its DPU by an estimated S$0.003.
The 3% increase in interest rates will result in DPU declining by S$0.009, representing an 8.6% drop for the REIT’s TTM DPU.
Assuming a cumulative 3.5% interest rate hike, this will result in a 9.1% drop in FY2021’s DPU.
But with CapitaLand Investment Limited as its sponsor, the REIT has the financial support to help it tide over this difficult period.
What’s more, the REIT can buffer against this decline by engaging in acquisitions and/or asset enhancement initiatives (AEI) that will raise DPU.
For instance, it was recently announced that an AEI costing S$62 million, CQ @ Clarke Quay, has officially commenced and is estimated to be completed by 3Q2023.
Our team has spent decades scouring SGX for stocks. And we think dividends could be the answer to rising inflation and market uncertainty in 2023. With our newest FREE report, you’ll have everything you need to find, keep and make more money from dividend stocks. Click here to download it for free.
Disclosure: Ryan Yap does not own any of the shares mentioned.