Two S-Reits lead the STI in early 2023
FOR Q1 2023 through to Feb 9, the Straits Times Index (STI) has added a 3.6 per cent total return to the 8.4 per cent 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.
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, that is, China, Hong Kong, Malaysia, and Indonesia. After Yangzijiang Shipbuilding (Holdings) led the STI in 2022 with a 107.4 per cent total return, it has been the least performing STI constituent in Q1 2023 to Feb 9, with an 8.8 per cent 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 at 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 Q1 2023 to Feb 9. This has coincided with the iEdge S-Reit Index generating a 6.6 per cent total return over the 26 sessions and 10-year US Treasury yields declining from 3.88 per cent to 3.66 per cent’
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 per cent FY2022 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 about S$20 billion.
Back in Q1 2021, 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 Q1 2021, 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.
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KDCR has since pressed ahead with acquisitions, completing the acquisitions of London Data Centre on Jan 11, 2022, Guangdong Data Centre 2 and the building shell of Guangdong Data Centre 3 (scheduled to be fully fitted by Q3 FY2023) on Aug 12, 2022. Prior to this, in 2021, KDCR completed the acquisitions of Eindhoven Data Centre and Guangdong Data Centre 1. These acquisitions contributed to FY2022 distributable income. KDCR maintained approximately S$3.7 billion of AUM as of Dec 31, 2022. This was up from S$3.4 billion as at end 2021, S$3.0 billion at end of 2020, and S$1.0 billion at IPO on Dec 12, 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 per cent to 36.4 per cent, while the average cost of debt increased from 1.6 per cent to 2.2 per cent. As of Dec 31, 2022, as much as 74 per cent of the loans were fixed through interest rate swaps, with a sensitivity analysis showing a 100 bps increase for the unhedged loans would have had a ~2.1 per cent impact to Q4 2022’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 FY2022 from FY2021 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 per cent to 50 per cent.
Demand for cloud adoption, smart technologies, big‐data analytics, and 5G deployment have also provided a secular growth outlook with Danseb Consulting forecasting 15 per cent 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 per cent 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 FY2022, 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 at Dec 31, excluding the three properties under development in the UK and right-of-use assets. As much as 68 per cent of the portfolio is currently represented by logistics and industrials properties, with 23 per cent represented by office and business parks and 9 per cent represented by CBD commercial properties.
The Reit has a proven track record in undertaking value-accretive acquisitions, and portfolio recycling. For FLCT’s FY2022 (ended Sep 30), 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 S$342.0 million over the year.
From the end of 2021 to the end of 2022, FLCT’s aggregate leverage decreased from 34.3 per cent to 27.9 per cent, while the average cost of borrowings increased from 1.6 per cent to 1.7 per cent. As of Dec 31, 2022, as much as 78.7 per cent of the borrowings were on fixed rates and FLCT maintained a 13.6x interest cover ratio. FLCT noted in its Q1 FY2023 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 Q1 FY2023 business update, the logistics & industrial portfolio continued to maintain 100 per cent occupancy, which has been the case since the end of 2019. This has been on the back of robust demand from tenants operating across a number of sectors, including new economy industries with strong tailwinds. 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 per cent 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 per cent decline in total return since the end of 2019, in line with the FTSE ST Reit Index decline of 4 per cent and the FTSE EPRA/Nareit Global Reits Index decline of 3 per cent. FLCT and KDCR maintain respective weights of 5.5 per cent and 4.4 per cent 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 per cent and 11 per cent.
The iEdge S-Reit Index is a 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 per cent / new constituents: 20 per cent), velocity (existing constituent: 0.04 per cent / new constituents: 0.06 per cent), with 10 per cent weighting caps at periodical rebalancing’s, ensuring greater portfolio diversification. Since inception the iEdge S-Reit Index has become a familiar index for robo advisers, 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.
The writer is the market strategist at Singapore Exchange (SGX). To read SGX’s market research reports, visit sgx.com/research
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