As a follow up to our previous post on Keppel REIT, we are going to explore the impact on REIT payout ability with the impending rate hike by the US Federal Reserve this week. The world has been anticipating this for months and the stock markets were getting more volatile. We are not definitive of the stock markets direction post rate hike, but we do not what impact it will have to REITs which are typically more leveraged and has higher dividend payout than the usual stocks.
As a start, we are going to reproduce related key segments of the REIT comparison table we shared in our last post.
| S$ | CapitalCom | FrasersCom | Keppel | MapleTreeCom | OUECom |
| Stock Sticker | C61U.SI | ND8U.SI | K71U.SI | N2IU.SI | TS0U.SI |
| Price | 1.345 | 1.315 | 0.96 | 1.315 | 0.69 |
| Dividends | 2.49E+08 | 5.73E+07 | 2.06E+08 | 1.68E+08 | 4.60E+07 |
| Finance Expense | 3.64E+07 | 2.08E+07 | 6.01E+07 | 3.49E+07 | 1.86E+07 |
| Yield | 6.30% | 6.40% | 6.80% | 6.10% | 7.70% |
| Dividend/Finance Expense | 6.84 | 2.75 | 3.43 | 4.81 | 2.47 |
| Total Debt | 1.24E+09 | 6.92E+08 | 2.67E+09 | 1.55E+09 | 6.33E+08 |
| Average Debt Interest Rate | 2.94% | 3.01% | 2.25% | 2.25% | 2.94% |
The average debt interest rate ranges from 2.25% to 3%. It is pretty straightforward that with increase in interest rate, the available dividends to unit holders will decrease. But how sensitive is the dividend payout to increase in interest rate?
The graph above shows the impact of interest rate increase on dividend yield of the REITs. Vertical axis shows the dividend yield. Horizontal axis shows the interest rate increase. At interest rate increase = 0%, it shows the current environment, hence current dividend yield of each REIT. We draw quite similar conclusion to our previous post that Keppel REIT and OUE COM REIT are risky in that they risk having the lowest yield in the future with increasing interest rate. They have the steepest curves compared to the others with CapitalCom Trust and Mapletree having more gentle slopes which means they are less sensitive to interest rate hikes. This can be explained by their higher Dividend/Interest Expense ratio as shown in the table above.
Beside having lower dividend payout, if the market decide to hold the REIT at constant yield of current environment, for example for Keppel REIT, 6.8%. At a interest hike of 2%, the dividend yield will be 5%, the REIT price will potentially drop by 25% to meet current yield. So current REIT unit holder actually suffer a double whammy of lower dividend payout and lower REIT price. For Mapletree, price drop will be less drastic at 18%.
This all the more shows the importance of selecting less leverage REITs with higher dividend/interest expense ratio as they are inherently more defensive than the more leveraged ones. This will be a key important point that we will look at when selecting potential REIT for investment.
Appreciate any views for further discussion.
The Valumetrics Team
Valumetrics.co 
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