Two S-REITs Lead the STI in Early 2023

• The STI continues to be home to 30 different stocks that on the whole report generally as much revenue outside Singapore as within Singapore. Much of this international revenue is aligned with the same destinations that Singapore maintains its strongest trade relationships with, i.e., China, Hong Kong, Malaysia, and Indonesia.
   
• After Yangzijiang Shipbuilding (Holdings) led the STI in 2022 with a 107.4% total return, it has been the least performing STI constituent in 1Q23 to Feb 9, with an 8.8% decline. The Jiangsu-based shipbuilder’s orderbook is mainly denominated in USD and stood at 143 vessels with US$10.3 billion in contract value as of November 2022.
   
• At the same time, Keppel DC REIT (“KDCR”) and Frasers Logistic & Commercial Trust (“FLCT”) which were among the three least performing STI constituents in 2022, have led the STI over in 1Q23 to Feb 9. This has coincided with the iEdge S-REIT Index generating a 6.6% total return over the 26 sessions and 10-year US Treasury yields declining from 3.88% to 3.66%. 
   

Two S-REITs Lead the STI in Early 2023

For the 1Q23 through to Feb 9, the Straits Times Index (STI) has added a 3.6% total return to the 8.4% total return booked in 2022. The STI also formed a nine-month high of 3,408.19 on Jan 30, which followed on from a key US inflation report, and coincided with the Singapore stock market’s busiest trading session since the end of 2022.

While the STI ranked among the globe’s strongest stock benchmarks in 2022, the past six weeks have seen European, and in Asia, Taiwan and South Korean stock indices lead the performance tallies. This indicates that for all the focus on global inflation, growth outlooks have also remained key market drivers. As the IMF relayed from Singapore on Jan 31, European “economic growth in 2022 was more resilient than expected” and China’s “recent reopening has paved the way for a faster-than-expected recovery”. This has seen regional markets more focused on the renewed outlook for China growth, and less focused on the trail of trade contractions booked by Taiwan, South Korea, and Singapore since October.
 

Keppel DC REIT

Acquisitions and prudent capital management have helped KDCR offset the overarching theme of inflation which has impacted electricity, staff and maintenance costs. As reported in January, the 7.7% FY22 growth in KDCR’s distributable income was attributed to the addition of quality assets and proactive asset management.

The past two years saw more than half of the stocks that make up the S-REIT Sector pursue acquisitions, with a combined deal value of ~S$20 billion.

Back in 1Q21, the Chairman and Non-Executive Director of the Manager, Christina Tan reiterated that KDCR would “leverage the unique strengths of the Keppel Group in project development and facilities management, to continue to pursue strategic growth opportunities that complement KDCR’s portfolio, as well as strengthen its presence across key data centre hubs”. In 1Q21, KDCR maintained an interest coverage ratio (ICR) of 13.1x, while in the United States, NAREIT estimated the median or typical ICR across the REIT universe was 4.0x.

 KDCR has since pressed ahead with acquisitions, completing the acquisitions of London Data Centre on 11 January 2022, Guangdong Data Centre 2 and the building shell of Guangdong Data Centre 3 (scheduled to be fully fitted by 3QFY23) on 12 Aug 2022. Prior to this, in 2021, KDCR completed the acquisitions of Eindhoven Data Centre and Guangdong Data Centre 1. These acquisitions contributed to FY22 distributable income. KDCR maintained approximately $3.7 billion of AUM as of 31 December 2022. This was up from $3.4 billion as at end 2021, S$3.0 billion at end of 2020, and S$1.0 billion at IPO on 12 Dec 2014.

On the capital management side, from the end of 2021 to the end of 2022, KDCR’s aggregate leverage marginally increased from 34.6% to 36.4%, while the average cost of debt increased from 1.6% to 2.2%. As of 31 December 2022, as much as 74% of the loans were fixed through interest rate swaps, with a sensitivity analysis showing a 100bps increase for the unhedged loans would have had a ~2.1% impact to 4Q22’s DPU on a pro forma basis.

The Manager also borrows in currencies that correspond with its investments to provide a natural hedge to the extent possible, and the borrowings are diversified across five currencies. Nonetheless the incremental cost of debt in FY22 from FY21 has seen the ICR of KDCR decline to 7.6x at the end of 2022. However, the ICR remains well above the stipulated 2.5x minimum level that enables a property fund to expand its aggregate leverage from 45% to 50%.  

Demand for cloud adoption, smart technologies, big‐data analytics, and 5G deployment have also provided a secular growth outlook with Danseb Consulting forecasting 15% growth in the global colocation market in 2023, with hyperscalers accounting for the bulk of the growth. Since listing in December 2014, KDCR has generated 16% annualised total returns, and was included into the STI in October 2020.

Frasers Logistic & Commercial Trust

FLCT was created by the S$6.0 billion merger between Frasers Logistics & Industrial Trust and Frasers Commercial Trust in early 2020. The diversified REIT derives its income from properties in Australia, Germany, the Netherlands, Singapore, and the UK. While the Singapore Dollar had appreciated strongly against the Australian Dollar, Euro, and British Pound in its FY22, these currency pairs are currently not far off their respective end of September levels.

FLCT’s 105 properties maintained a portfolio value of S$6.7 billion as of December 31, excluding the three properties under development in the UK and right-of-use assets. As much as 68% of the portfolio is currently represented by Logistics and Industrials properties, with 23% represented by Office and Business Parks and 9% represented by CBD Commercial properties.  

The REIT has a proven track record in undertaking value-accretive acquisitions, and portfolio recycling. For FLCT’s FY22 (ended 30 Sep), the sale of Cross Street Exchange saw the rebalancing of the portfolio to maintain a logistics and industrial bias. The Manager of FLCT also executed a number of value accretive acquisitions, with an aggregate value of approximately $342.0 million over the year.

From the end of the 2021 to the end of 2022, FLCT’s aggregate leverage decreased from 34.3% to 27.9%, while the average cost of borrowings increased from 1.6% to 1.7%. As of 31 December 2022, as much as 78.7% of the borrowings were on fixed rates and FLCT maintained a 13.6x interest cover ratio.  FLCT noted in its 1QFY23 Business Update that every potential 50 bps increase in interest rates on variable rate borrowings is estimated to impact DPU by 0.06 Singapore cents.

FLCT also highlighted in the 1QFY23 Business Update, the Logistics & Industrial portfolio continued to maintain 100% occupancy, which has been the case since the end of 2019. This has been on the back of back of robust demand from tenants operating across a number of sectors, including new economy industries with strong tailwinds. As Sustaining demand were three current global trends: the continued growth of e-commerce, albeit at a more moderate pace compared to the last two years; the evolution of inventory management models to enhance supply chain security; and the transition to net-zero carbon.

Using the listing of Frasers Logistics & Industrial Trust in June 2016 as base, FLCT has since generated 12% annualised total returns, and joined the STI in April 2021.

The iEdge S-REIT Index

The iEdge S-REIT Index consists of 36 REITs and property trusts and has generated a 3% decline in total return since the end of 2019, in-line with the FTSE ST REIT Index decline of 4% and the FTSE EPRA/NAREIT Global REITs Index decline of 3%. FLCT and KDCR maintain respective weights of 5.5% and 4.4% within the iEdge S-REIT Index, and both outpaced these benchmarks from the end of 2019 to Feb 9, 2022, with respective total returns of 26% and 11%.

The iEdge S-REIT Index free-float market capitalisation weighted index that measures the performance of REITs and property trusts listed in Singapore. Constructed to be a tradable index with sufficient liquidity and representation, its index constituents are screened for free float (existing constituent: 15% / new constituents: 20%), velocity (existing constituent: 0.04% / new constituents: 0.06%), with 10% weighting caps at periodical rebalancing’s, ensuring greater portfolio diversification. Since inception the iEdge S-REIT Index has become a familiar index for robo advisors, Exchange Traded Funds (ETFs), while also gaining traction with funds particularly across Asia.

The iEdge S-REIT Leaders Index is the most liquid representation of the S-REIT Market in Singapore and the underlying index of the CSOP iEdge S-REIT Leaders Index ETF which maintains more than S$90 million of assets under management.
 

10 STI Stocks with highest total returns in 1Q23 to 9 Feb	Code	Mk Cap S$M	Avg Daily Traded T/O in 1Q23 to 9 Feb (S$M)	Net Fund Flows in 1Q23 to 9 Feb (S$M)	Total Return 1Q23 to 9 Feb (%)	2022 Total Return(%)	Sector
Keppel DC Reit	AJBU	3,472	13.2	12.6	17	-25	REITs
Frasers L&C Tr	BUOU	4,862	14.5	25.8	13	-19	REITs
DFIRG USD	D01	5,994	3.2	13.4	13	5	Consumer Non-Cyclicals
ST Engineering	S63	11,485	16.4	40.5	10	-6	Industrials
Sembcorp Ind	U96	6,640	12.3	28.6	10	73	Utilities
Venture	V03	5,378	13.3	44.4	8	-3	Technology
Mapletree Log Tr	M44U	8,128	27.5	-15.5	8	-12	REITs
OCBC Bank	O39	58,878	65.3	138.1	8	12	Financial Services
SATS	S58	3,418	10.7	16.8	7	-27	Industrials
Mapletree PanAsia Com Tr	N2IU	9,215	21.6	-3.7	7	-12	REITs

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Originally Posted February 13, 2023 – Two S-REITs Lead the STI in Early 2023