For investors, making yield plays seem to be a highly sensible thing to do. According to DBS, here are 4 yield plays that investors should consider.
Investors Takeaway: 4 Yield Plays As Trade War Uncertainties Linger By DBS
With the rise of its REITs’ share prices, DBS sees a window of opportunity for Frasers Property (Frasers) to capitalise and grow its REITs AUM. One strategy that DBS thinks Frasers Property can adopt is to recycle its mature assets into its listed REITs. This can help the developer to grow its AUM and re-allocate funds towards higher return investments.
Overall, DBS remains highly positive on Frasers Property due to its limited exposure to Singapore residential properties amidst subdued sentiments. Its strong recurring income profile as a landlord in the commercial space, rising stakes in PGIM, and news of interested parties for the newly completed Frasers Tower meant that the developer could potentially benefit from the URA Masterplan 2019 which emphasizes on the redevelopment of CBD. This could return higher plot ratio for Frasers Property in the prime district.
Right now, Frasers Property valuation remains attractive at 0.7 times price-to-book value. With its dividend yield being the highest among developers (five percent), this makes it a safe harbour in the current uncertain times.
Keppel KBS US REIT
Among the REITs, Keppel KBS US REIT is one of the REITs that DBS remains bullish on. This is because of Keppel KBS US REIT’s managerial guidance that it will achieve high single-digit rental reversions for leases due for renewal for the remainder of the year. This is supported by an independent view from CoStar, which also gave a similar forecast.
DBS notes that the market has been extremely sceptical of the boost from the recent acquisitions (Westpark portfolio and Maitland Promenade I) following the disappointment over the rights issue conducted in late-2018. However, with 1Q19 DPU rising six percent year-on-year, some of the market concerns should be allayed.
With Keppel KBS US REIT trading at attractive valuations, ten percent discount to book value during an office upturn and high yield of 7.6 percent makes it one the top yield plays.
OUE Commercial REIT
The narratives around OUE Commercial REIT have been dominated by its recent proposed merger between OUE Commercial Trust and OUE Hospitality Trust. According to DBS, the marriage is a bold but necessary step in an investment climate where “big is good”. Post-merger, OUE Commercial REIT will become the 8th largest S-REIT by assets.
According to DBS, the larger OUE Commercial REIT will place it on the radar of wider pool of institutional investors and potentially result in greater broker coverage. The enlarged OUE Commercial REIT will also be able to take on larger scale opportunities. However, it may require some equity raising given its already high gearing ratio of 40 percent.
That said, if the manager delivers on its growth strategies and OUE Commercial REIT gains inclusion to various indexes, a virtuous positive cycle could result in a lower cost of capital over time. At the current share price of $0.530, OUE Commercial REIT has an indicative yield of 6.2 percent.
Netlink NBN Trust
Netlink Trust is amongst DBS’ top pick in the dividend category for its attractive yield. Compared to the large-cap industrial S-REITs, Netlink Trust stands out for its FY20F yield of around 5.7 percent. DBS believes that Netlink Trust is currently undervalued given that its distribution is largely independent of the economic cycle, its low gearing ratio to fund future growth and its longer asset life compared to the S-REITs.
As interest rates outlook remains flattish and the market continues to search for high yields, DBS thinks that Netlink Trust will shine into prominence. DBS notes that rising cost of capital will help Netlink Trust bring about higher regulated returns and translate into higher distributions for unitholders. Moving forward, if Netlink Trust uses its debt headroom to invest in Smart Nation initiatives, it could catalyse the share price of Netlink Trust in the near future.