1. Yield Spread: S-REIT Dividend Yield vs 10Y Government Bond
Source: Maybank Kim Eng Research Report
S-REIT's dividend yield has been compressed when the sector starts to trend up since 2015. It is currently trading near the -1sd with an average yield of 4.9% (historical average was 6.3%). The distribution per unit (DPU) is unable to catch up with the recent hike in stock prices.
However, if we look at the yield spread (comparing S-REIT's yield with 10Y government bond), the spread remains quite stable in the past few years. The spread is the range of 3.5% - 4.5%. The lowest level was before the Global Financial Crisis in 2007, in the range of 1% - 1.5%. While the S-REIT is getting "expensive" based on yield, but it is "cheap" if we compare it with the 2007 level.
2. S-REIT Interest Coverage
One of the major cost of S-REIT is interest expenses. Thus, it is critical to look at the interest coverage ratio when we evaluate REITs. The higher the interest coverage, the more stable the REIT's DPU is. The sector average is 4.5. Based on our strategy, any new addition to the portfolio will only be considered if the interest coverage ratio is above 5.
3. Gearing Ratio
S-REIT is currently trading at a gearing level of 34.8%. Based on the current MAS regulation, the cap is at 45%. There is a proposal to increase the cap to 50%. This would give S-REIT extra headroom to grow their portfolios through debt financing.
Only 5 REITs are trading above 40% gearing ratio currently. Based on the current cap, anything below 40% level would be a safer bet for investors.