With rates higher for longer, S-REITs to stay lower for longer says JP Morgan

If rates stay higher for longer, S-REITs could stay lower for longer

JP Morgan, in an update on Mar 5, expects S-REITs to stay lower for longer due to stubbornly high inflation prints.

“With the latest US inflation prints, the S-REIT rally has been pushed out to July to September with the Fed funds rate expected to peak at 5.4%-5.5% versus 5% previously,” the JP Morgan report says.

More adverse news for S-REITs are in store. According to JP Morgan, about a month ago, the Singapore swap curve – which was being inverted, thus enabling REITs to refinance debt at 3% - has resorted to its flattening form and REITs will only be able refinance debt at the mid- to high 4%. “In the event of further flattening of SG yield curve, there are further downside risks to our DPU estimates,” JP Morgan says.

“We felt that Street estimates were too high as consensus had yet to fully price in the impact of higher rates. Since our 2023 outlook report in mid Dec-2022 and results preview in mid Jan-2023, consensus has cut FY2023/2024 DPU by 3%-5% and 1%-2% on average.” JP Morgan continues.

The report warns of further downside risks ahead, in particular for office REITs where its DPU projections for Suntec REIT and Keppel REIT remain 9% to 16% below Street estimates.

Additionally, selected REITs may resort to equity fund raising (EFR). For instance, ESR-LOGOS REIT has already raised $150 million from a placement and plans to raise a further $150 million via a preferential EFR.

There is market talk that Manulife US REIT may have found a white knight. Inevitably, it may need to issue units to the white knight, failing which it may need an EFR. The manager is exploring divestments as well.

EC-World REIT has announced a sharp cut in DPU and in replies to the SGX says dated Mar 2 says “As stated in the 28 February 2023 Announcement, unless and until the Lenders’ consent is obtained, the ECW Group is in breach of its Mandatory Repayment obligations, which triggers an event of default under the Existing Offshore Bank Loans and Existing Onshore Bank Loans.”

EC World REIT’s manager has asked for and received forbearance while its Lenders are in the process of obtaining their internal approvals. “The term sheets to refinance the April 2023 Outstanding Loans have been finalised with the lead lenders and are subject to the confirmation of the Lenders pending their internal review and approval process,” EC World REIT’s manager says. EFR would be a last resort for some of these REITs.

As far as Suntec REIT is concerned, JP Morgan expects its manager to divest rather than announce an EFR. “Our view is that balance sheet risks have receded in the near term with REITs largely reporting stable valuations, and we believe that REITs with higher gearing, such as Suntec REIT, will prioritise asset divestments ahead of equity raising,” JP Morgan says.

It expects S-REITs with larger defensive Singapore exposure such as CapitaLand Ascendas REIT, CapitaLand Integrated Commercial Trust and Frasers Commercial Trust to hold up better.

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