S-REITs have been trading below their long-term average price to book (P/B) valuation for a while now. Every month, when the closely watched US Consumer Price Index (CPI) economic indicator shows that inflation is still a concern, the likelihood of interest rate cuts decreases, and REITs see their share price plunge.
| REIT | Ticker (SGX) | Current P/B ratio (times) | 5-year average P/B ratio (times) | Discount to 5-year average P/B | Yield |
| Frasers Logistics & Commercial Trust | BUOU | 0.91 | 1.13 | -20% | 6.8% |
| Keppel DC REIT | AJBU | 1.27 | 1.75 | -27% | 6.0% |
| Mapletree Pan Asia Commercial Trust | N2IU | 0.77 | 1.11 | -30% | 6.6% |
| Keppel REIT | K71U | 0.66 | 0.80 | -17% | 6.7% |
| Mapletree Logistics Trust | M44U | 1.07 | 1.29 | -17% | 6.1% |
While it is anyone’s guess when interest rates will actually be cut by the US Federal Reserve, REITs still provide a decent yield that is higher than the Treasury yields.
In addition to the attractive yields, there is an opportunity for capital gains for REITs trading below their long-term valuations.
Here we look at 5 top names that are trading a fair bit below their long-term averages and what they are doing for long-term value growth.
1) Frasers Logistics & Commercial Trust (SGX: BUOU)
Frasers Logistics & Commercial Trust (FLCT) recently completed the acquisition of an 89.9% interest in a logistics and industrial (L&I) portfolio comprising four properties located in Germany at €129.5 million from the sponsor, Frasers Property.
The number of German L&I assets in FLCT’s portfolio has increased to 33 assets, or 25.5% of FLCT’s portfolio value. The proportion of L&I assets in FLCT’s portfolio will increase from 70.3% to 71.1%.
The freight and logistics market in Germany is one of the largest in Europe and remains attractive due to its strategic location within the region. The German logistics sector has maintained its resilience, driven by strong underlying market fundamentals, bolstered by close to record low vacancy rates and a slowdown in new developments, resulting in limited supply in key logistics hotspots. This situation has driven market rents up by 12% in 2023.
The acquired buildings are fully leased to quality tenants, including multinational corporations such as Schenker, DACHSER and Hermes Germany, which are existing tenants within FLCT’s portfolio. These are key third-party logistics providers with exposure to the new economy sectors such as e-commerce fulfilment services.
Three of the assets are freehold and strategically located within the “Blue Banana” region which denotes the European regions with dense urban population of over 110 million and represents the corridors of Europe, passing through its two largest ports (in Belgium and the Netherlands), across the Rhine region in Germany to northern Italy. Additionally, one property is located close to FLCT’s existing assets within the Frankfurt logistics cluster.
The fourth asset is situated in proximity to the Port of Hamburg, the largest port in Germany. This enlarged footprint further deepens FLCT’s L&I presence in its existing core market.
FLCT’s leverage remains the lowest amongst the Top 10 largest S-REITs at 32.5% while providing the highest yield in this list. FLCT has a debt headroom of $1.06b to a 40% leverage ratio and $2.64b headroom to a 50% leverage ratio. We expect FLCT to carry out more accretive acquisitions when opportunities arise.
2) Keppel DC REIT (SGX: AJBU)
Keppel DC REIT (KDCR) recently announced the sale of a Sydney data centre asset at 35.4% premium over valuation for A$174 million. At the same time, KDCR announced that it would reinvest A$90 million of the sales proceed into an Australian Data Centre Note issued by Macquarie.
The note is guaranteed by the listed entity Macquarie Technology Group (ASX:MAQ) and will provide a regular income stream starting from approximately A$6.3 million per year, with a CPI linked annual escalation mechanism, for 8.5 years.
The income stream from the AU DC Note will mirror the rental income the REIT would receive from the Sydney data centre asset if the asset were held for another 8.5 years.
The transactions will be 0.7% accretive to DPU, provide for a $0.02 increase of the NAV to $1.36, and the aggregate leverage is expected to improve to 36.6%.
This transaction attests to the strength of KDCR’s management team and explains their long term premium to book. Being able to divest an asset at a higher cap rate and then reinvest the proceeds into a note that’s linked to its seller demonstrates the ability to garner value for its shareholders.
3) Mapletree Pan Asia Commercial Trust (SGX: N2IU)
Mapletree Pan Asia Commercial Trust (MPACT) has the biggest discount to the 5-year average P/B on this list. One significant reason is due to the merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust in December 2021, which changed the profile of the portfolio and the valuation placed on the combined entity.
Since then, MPACT has not carried out any acquisition and has focused on keeping its trophy retail assets competitive, as well as backfilling vacancies in their office assets as and when they arise. This could be partially because the aggregate leverage ratio is nearly 41% and any substantial acquisition that would move a needle on its bottom line would likely require equity fund raising.
However, MPACT is still a preferred buy as shared previously here on the basis that investor expectations on MPACT’s core Singapore portfolio have always been high, allowing the share to command a high P/B and low yield. At a 6.6% yield, the stock starts to look interesting from a valuation perspective.
4) Keppel REIT (SGX: K71U)
Keppel REIT acquired an effective 50% interest in 255 George Street, a freehold Grade A office building in Sydney, Australia, for A$363.8 million. The remaining 50% interest in the property will continue to be held by the seller, Mirvac Funds Management Australia Limited.
With a high committed occupancy rate of 93%, the property also enjoys stable cash flows underpinned by a long WALE of 6.8 years with no significant lease expiries from 2024 to 2028. In addition, the property has a diversified tenant base from various industries, including the government, financial institutions, healthcare and information technology. The key tenants include the Australian Taxation Office and the Bank of Queensland.
Situated along the prime end of George Street, within Sydney CBD’s Core Precinct, the asset benefits from a flight-to-core trend with the Core Precinct outperforming other precincts in terms of vacancies. The Core Precinct’s all-grade office vacancy was 11.5% as of 4Q 2023, the lowest among the four key submarkets within the Sydney CBD, leading the recovery with five consecutive quarters of declining office vacancies.
The asset is expected to generate a first-year yield that exceeds 6.0% and DPU accretion of 1.4%. Additionally, the seller will be providing rent guarantee on existing vacancies and potential expiries. Gearing is expected to increase from 38.9% to 41.0%.
Keppel REIT had a well managed balance sheet, allowing it to be opportunistic. This acquisition comes across as a good addition to Keppel’s portfolio, being well located and having an occupancy that’s above the average. The yield is also attractive and provides for a DPU accretion in line with the gearing increase.
5) Mapletree Logistics Trust (SGX: M44U)
Mapletree Logistics Trust (MLT)’s share price faced pressures as nearly 36% of its revenue was generated from China and HK SAR, economies that have been weak. Japan, which has seen the Yen decline substantially, contributed 12% of revenues to the REIT.
To further diversify its portfolio, MLT looked towards Malaysia and Vietnam, which previously contributed 5% and 4% of revenue respectively.
MLT is acquiring 3 Grade A assets at S$226.3 million to deepen its presence in Malaysia and Vietnam. These two countries are viewed as dynamic logistics markets underpinned by favourable structural trends such as consumption growth and supply chain diversification. The acquisitions will be partially funded by recent divestment proceeds, in line with MLT’s portfolio rejuvenation strategy and the acquisitions are expected to be DPU accretive.
MLT has a large portfolio that is diversified across Asia. The large portfolio provides the flexibility to carry out portfolio rejuvenation strategy by divesting mature assets at lower yields to acquire higher yielding assets in stronger market.
Closing statements
The discount to P/B reflects the tough times REITs have been going through in recent times. REITs have faced pressures to their bottom line due to a weaker economic environment, higher inflationary costs, and increased interest rates. To make things more worrisome, asset valuations are on the decline as a result of these factors.
Nevertheless, REITs are keeping themselves competitive by rejuvenating their asset or carrying out accretive acquisitions. They stand a good chance of mean reversion to their long term value.
Join us for our next webinar session to find out how we identify and select REITs for higher and sustainable yields.