S-REITs & Property - CIMB Research 2017-07-17: 2Q17 Results Preview ~ Focus On Replacement Cost And Spot Rents

Property - Overall - CIMB Research 2017-07-17: Focus On Replacement Cost And Spot Rents Property Sector S-REITs Sector 2Q17 Results Preview CAPITALAND LIMITED C31.SI CITY DEVELOPMENTS LIMITED C09.SI FRASERS CENTREPOINT LIMITED TQ5.SI GUOCOLAND LIMITED F17.SI HATTEN LAND LIMITED PH0.SI HO BEE LAND LIMITED H13.SI HONGKONG LAND HOLDINGS LIMITED H78.SI PERENNIAL REAL ESTATE HLDGSLTD 40S.SI UOL GROUP LIMITED U14.SI WING TAI HLDGS LTD W05.SI

S-REITs & Property - Focus On Replacement Cost And Spot Rents

  • Maintain Overweight on developers and lower S-REITs weightage to Neutral ahead of the results season.
  • New launches and asset recycling are near-term earnings drivers for developers; land replacement cost, balance sheet and capital deployment to drive outlook.
  • For S-REITs, slow organic growth and negative rental reversions are partly offset by contributions from new acquisitions.
  • Top sector picks are UOL, City Dev, Capitaland and Wing Tai for developers and FLT, MCT and MAGIC for S-REITs 



2Q17 Results Preview 

  • As we move into the results season, we expect S-REITs to continue to deliver a slow grind in earnings due to modest rental growth outlook, with low risk of significant revaluation deficit. New acquisitions should partly offset income vacuum from asset enhancements. 
  • We expect developers to deliver a fairly stable yoy set of results, with stronger performance from FCL and Capitaland, thanks to the recent Seaside Residences launch and asset recycling activities.


Focus on replacement cost and spot rents 

  • Property stocks and S-REITs have been among the best performing sectors in Singapore equities year to date, rising 16% and 11% respectively since the beginning of this year. 
  • At present, developers’ discount to RNAV and S-REIT yields have reverted to close to mean. 
  • We take the opportunity to preview our expectations and re-assess the sector ahead of the upcoming results season.


Singapore Developers’ 2Q17 Results Preview 

  • We expect the developers’ results season to kick off from the latter part of Jul to Aug. Generally, we expect developers to continue to deliver higher yoy results through recognition of development profits from ongoing projects in Singapore and overseas, as well as stable rental income. These activities are likely to boost their earnings and ROEs. Another key feature would be asset divestment gains.
  • Forex translation impact from a stronger A$ vs. S$ would likely mean a slight positive translation gain for Frasers Centrepoint Limited (FCL) from its Australian operations while the weaker yoy £ performance could mean a marginal drag on those with UK exposure, such as Ho Bee Land and City Dev. Revaluation movements likely remained positive.
  • We think Capitaland is likely to benefit from gains from the sale of an office property by CCT, serviced residence to ART and China commercial assets, as part of its capital recycling programme. 
  • For City Dev, we expect stable yoy performance, on the back of potential profits from China and UK projects, which were completed during the quarter, and continued take-up of its Singapore projects. This could be partially offset by continued soft hotel operations. 
  • We think UOL’s upcoming results (excluding revaluations) would likely be weaker qoq and stable yoy, due to lack of completion of ongoing projects. This should be partly offset by stable rental income and progressive sales, and the recognition of The Clement Canopy which was launched in 1Q17. 
  • The launch of Seaside Residences in Apr 17 would likely boost Singapore development income for FCL and translate to a higher qoq and yoy performance.






S-REITs’ 2Q17 Results Preview 

  • The S-REITs’ results season has kicked off from mid-Jul onwards. We expect a muted reporting season, with no major surprises. 
  • We anticipate the office leasing market to continue to experience a yoy downward bias in rental reversions, even as occupancies hold up. The retail rental market remains competitive due to anaemic retail sales. Retail REITs are undertaking asset enhancement initiatives (AEIs) during this period to improve the longer-term returns from their properties, and this would likely moderate near-term growth.
  • New acquisitions by industrial REITs should fill in the vacuum left by negative rental reversions and multi-tenant building (MTB) conversions. 
  • With the onset of 2Q results, we believe any revaluation exercise undertaken would result in a moderate uplift in asset values, largely coming from anaemic income growth rather than from cap rate compression.
  • That said, we think OUEHT may beat expectations on higher-than-expected income support, while ART may do a capital distribution from gains from asset sales to moderate the dilutive impact of a pre-emptive rights issue undertaken earlier.
  • As a whole, we expect S-REITs’ gearing to remain flat or dip slightly, thanks to equity fund raising exercises undertaken. Note that ART, OUECT, CDREIT undertook pre-emptive rights issue while FLT did a placement to fund the asset purchases in Australia. 
  • On the other hand, CCT divested 50% of One George St, and recently Wilkie Edge and freed up its balance sheet for the redevelopment of Golden Shoe Carpark. Given the steady short-term rates, we believe funding costs would remain relatively stable qoq. The impact of lower gearing, post fundraising, should be felt from 2H17.

Focus on rental reversion spreads 

  • Not surprisingly, we expect office REITs to experience negative but decelerating rental reversions, although occupancies would remain high. With little expected expiries in 2Q, we expect earnings likely remained relatively flat qoq. Specifically for CCT, the 50% stake sale in OGS, completed in 2Q, likely resulted in a S$79.7m gain.
  • We think the latest asking rents and rental reversion spreads within the S-REITs portfolio would be in focus, as property consultant JLL indicated that Grade A office rents in Marina Bay and CBD of Singapore posted their first 0.6% qoq and 1.3% qoq increases in 2Q after posting declines for two years, thanks to stronger-than-expected take-up of new office space and easing of new incoming supply pressure from 2018-2020.

Occupancy cost remains key 

  • Near-term growth for retail REITs would continue to remain positive but muted as anaemic retail sales and asset enhancement works or redevelopment activities are currently underway. 
  • MCT is likely to deliver a good showing post the acquisition of MBC whilst retail rental reversion could be more tempered at positive high single-digit. 
  • For CMT, we expect topline was likely impacted by the closure of Funan Mall. 
  • For FCT, we expect the AEI for Northpoint to have peaked in the previous quarter and for occupancy to start trending up.

Acquisitions to drive industrial REITs’ earnings 

  • Industrial rents likely continued to see downward pressure in 2Q, although on a more moderated basis. Portfolio occupancies likely stayed firm as the pace of conversions to multi-tenanted properties abated and landlords focused on tenant retention. 
  • Industrial REITs have been in an acquisition mode and additional income from these purchases should provide some uplift.

Supply continued to drag hotel room rates 

  • Continued weak corporate demand and new incoming supply likely dragged hotel industry Revpar. This was partly offset by new acquisitions. 
  • CDREIT recently proposed a rights issue to pare down debt and announced plans to acquire two hotels in the UK and Germany. 
  • For FEHT, which posted a steeper 4.6% decline in Revpar in 1Q17, we expect Revpar performance in 2Q was likely slightly better due to a low base last year.

Healthcare REITs to benefit from acquisitions and organic growth 

  • We expect healthcare REITs such as PREIT and FIRT to continue delivering growth through acquisitions as well as organic expansion through their master leases and strong underlying hospital performance. 
  • Post adjustment for the divestment of its share of two assets, RHT should continue to deliver growth through higher average revenue per operating bed and higher bed count.

Overseas-centric REITs to benefit from organic growth and favourable hedges 

  • We expect S-REITs with overseas assets, such as CRT, to post yoy growth in earnings, thanks to new acquisitions and attractive locked-in currency hedges.
  • On the leasing front, MAGIC is likely to benefit from the recovery of retail activity in HK and also from the low base effect in China, following the confirmation of VAT at a lower-than-previously-accounted-for rate.








LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-17
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.190 Same 4.190
ADD Maintain ADD 11.630 Same 11.630
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