I was curious on how the Singapore REITs I held in my portfolio will hold the fort against the recent Fed rate hike. Thus, I dig into the financial result releases by each REIT recently for more details. I learnt a new term known as “Interest Rate Swap”. REITs issue bonds or notes as a form of interest rate swap.
Below is the definition taken from Investopedia. There is a video where you can watch for easier understanding.
An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.
Below are some statements extracted from the financial results which indicate fixed rate interest as a form of hedging or usage of interest rate swap to manage exposure to interest rate fluctuations.
Cambridge Industrial Trust
Cambridge Industrial Trust has 96.5% of interest rate exposure fixed for next 3.2 years. Borrowing costs significantly insulated against interest rate increases.
Frasers Commercial Trust
Frasers Commercial Trust has 81% of its debt hedged and 19% floating.
(Read more: Frasers Commercial Trust Achieves All Time High DPU of 9.71% for FY15)
Suntec REIT
Uses interest rate swap to manage exposure to fluctuations in interest rates.
(Read more: Suntec REIT DPU Rises for 3Q2015)
Soilbuild Business REIT
95% of debt hedged.
Far East Hospitality Trust
Uses interest rate swap to manage exposure to fluctuations in interest rates.
(Read more: Far East Hospitality Trust DPU Fall for 3Q2015)
CapitaMall Trust
Uses interest rate swap to manage exposure to fluctuations in interest rates.
Keppel REIT
Increased fixed-rate loans to over 70%, which will insulate against interest rate fluctuations, while allowing for financial and operational flexibility.
(Read more: Keppel REIT announces DPU of 1.70 cents for 3Q2015)
Mapletree Commercial Trust
Uses interest rate swap to manage exposure to fluctuations in interest rates.
(Read more: Mapletree Commercial Trust DPU Rises 2.5% to 2.02 cents 2QFY15)
OUE Hospitality Trust
Uses interest rate swap to manage exposure to fluctuations in interest rates.
ParkwayLife REIT
ParkwayLife REIT has hedged approximately 78% of its interest rate exposure.
(Read more: Parkway Life REIT DPU Increases for 3Q2015)
Conclusion
As a conclusion, we can see that most Singapore REITs are well defended against the Fed interest rate hike.