REIT - CIMB Research 2017-08-31: Deal Or No Deal > Come What May End-2017

REIT - CIMB Research 2017-08-31: Deal Or No Deal: Come What May End-2017 Singapore REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI FAR EAST HOSPITALITY TRUST Q5T.SI KEPPEL DC REIT AJBU.SI

REIT - Deal Or No Deal: Come What May End-2017

  • Spurred by MLT’s recent acquisition of the Tsing Yi logistics facility, we sieve through the other S-REITs under our coverage which could undertake accretive-acquisitions.
  • We identify AREIT, FEHT and KDCREIT as most likely to undertake accretive-acquisitions from now till end-17.
  • Given their healthy balance sheets, we believe that funding structure for their respective acquisitions would be skewed towards debt. Hence, we advise investors to remain invested in these names.
  • Otherwise, we stay sector Neutral on valuations and prospects of a gradual rise in interest rates.



Looking at the glass as half-full 


Robust physical market 

  • Buoyed by liquidity and positive investor sentiment, investment volumes for the physical market continue to be robust. CBRE estimated that investment volume in 2Q17 (S$9.2bn) surpassed the previous peak set in 4Q16 (S$8.0bn). The landmark transaction in the quarter was Mercatus Co-operative’s acquisition of Jurong Point (suburban retail mall) for S$2.2bn or cap rate of 4.2% (S$3,343 psf) from Lee Kim Tah Holdings and Guthrie GTS.
  • The office and residential segments also continue to garner strong investor interest, with capital values firming up with upward pressure. In May 2017, CapitaLand Commercial Trust (CCT) divested its 50% stake in One George Street (OGS) to FWD Group for S$591.6m (S$2,650 psf). This translated into 3.2% exit yield. Net proceeds from recent divestments of OGS and Wilkie Edge would be funnelled towards the redevelopment of Golden Shoe Car Park.
  • Meanwhile, industrial REITs have been actively divesting non-core assets with limited growth and/or limited redevelopment potential. One notable transaction was Mapletree Logistic Trust (MLT)’s proposed divestment of 7 Tai Seng Drive for S$68m or c.2.5% exit yield (subject to JTC approval). The sales consideration was 79% above the original purchase price (S$38m) and 114% above the latest valuation (S$31.8m). We estimate a divestment gain of S$23.1m (c.9.5% of FY19F distributions), which the manager had said that it planned to distribute back to unitholders.
  • Another noteworthy divestment was Ascott Residence Trust (ART)’s planned divestment of two serviced residences in China (Citadines Biyun Shanghai and Citadines Gaoxin Xi’an) for c.S$198m or c.1.3% exit yield. The sale consideration was 69% above the latest valuation. The manager estimated a divestment gain of S$48.3m (c.32% of FY17F distributions). At this juncture, net sale proceeds could be used to pare down debt, fund potential acquisitions or distributed to unitholders.


Deal or no deal: Come what may end-2017 

  • Spurred by MLT’s recent acquisition of the Tsing Yi logistics facility, we identify the other S-REITs under our coverage which could undertake accretive-acquisitions from now till end-2017.
  • In the office segment, cap rates remain very tight and it is difficult to envision SREITs making further acquisitions. Nonetheless, newswires have reported that CapitaLand was in exclusive due diligence with a view to acquire Asia Square Tower 2. It was reported that the transaction could also involve CapitaLand Commercial Trust (CCT).
  • Furthermore, we note that Australian property developer Dexus had entered into a put option agreement with Southgate Trust (which Suntec REIT (SUN) has a 50% stake in) to sell the remaining 50% interest in Southgate complex (A-Grade office in Melbourne). Should the put option expire, Southgate Trust had, accordingly, been granted a call option to acquire the remaining 50% interests in Southgate complex. Hence, we think that SUN’s acquisition of its effective 25% stake in Southgate complex is only a matter of time.
  • In the retail segment, we believe that SPH REIT could look to acquire sponsor’s Seletar Mall. The mall’s first lease renewal cycle would be completed towards end-2017, and the REIT could potentially acquire the mall in late-2017 or early- 2018 if the asset stabilises.
  • Instead, we see a higher likelihood of acquisitions being completed by some of the industrial and hospitality REITs. There has been plenty of speculation that ESR REIT (EREIT) could spearhead a consolidation among the small-mid cap industrial REITs.
  • Nearer-term, we believe that Ascendas REIT (AREIT) and Keppel DC REIT (KDCREIT) could make acquisitions in 2H17F. YTD, both REITs have been rather quiet on the acquisitive front. After recent divestments, we believe that AREIT could redeploy capital and enhance its market share in Singapore business parks. Moreover, we believe that KDCREIT would need to execute acquisitions in order to meet its S$2bn AUM target by FY18. As both REITs have healthy balance sheets, we believe that they could lean towards debt to fund the acquisitions. 
  • Post-successful re-capitalisation of balance sheets, we believe that Ascott Residence Trust (ART) and CDL Hospitality Trust (CDREIT) could leverage up and acquire overseas assets, should the right deals come by. 
  • Among the hospitality REITs, we are of the view that Far East Hospitality Trust (FEHT) could be highly likely to acquire sponsor’s Oasia Hotel Downtown by year-end. We understand that the asset has stabilised and the REIT manager could lean towards debt to fund the potential acquisition.


Capital management remains sound 

  • YTD, a number of S-REITs have tapped the equity market to part-fund acquisitions. Some have also taken the opportunity to recapitalise their respective balance sheets. While MLT is looking to raise gross proceeds of S$640m from the equities market, ART, CDREIT, FLT, MUST and OUECT have successfully launched equity fund raisings this year. In the cases of ART and CDREIT, although the transactions were DPU-dilutive (as more equity was raised than needed), the two REITs have strengthened their balance sheets and are now able to deliver debt-funded acquisitions.
  • In addition, conversations with the REIT managers revealed that investors’ appetite for perpetual securities has returned, and the yields demanded by these investors have moderated. If anything, we are somewhat surprised that S-REITs have not aggressively taken advantage of this window of opportunity to pursue fund raisings. This could be a reflection that the right deals are generally difficult to come by and/or be closed, in our view.
  • Given the bolstering of balance sheets and hive of capital-recycling activities, SREITs’ capital management remains sound, in our view. The average aggregate leverage ratio for the S-REITs under our coverage stood at 34.6% at 30 Jun 2017, with all-in cost of debt stable at 2.7% p.a. Around 80% of debt has been hedged into fixed rates.
  • Furthermore, S-REITs have taken advantage of the still-low interest rate environment to refinance their debt early either through bank borrowings or issuance of bonds and MTNs (medium-term notes). Given the well-spread debt maturity profile (average debt maturity of three years), we deem that refinancing risk is low. Around 21% of total debt would be maturing in the next 6-18 months.



Valuation and recommendation 


Maintain sector Neutral; what to do with S-REITs 

  • Moored by valuations and prospects of a gradual rise in interest rates, we maintain Neutral on S-REITs. 
  • YTD, the FSTREI has gained 13.4%, slightly outpacing the FSSTI (+12.8%). We note that unit price performance of S-REITs picked up in mid-Mar when US President Trump failed to repeal the existing healthcare act, which puts a dent in his other fiscal proposals. In addition, cloudy US growth amid mixed data has resulted in a flattening of the US yield curve.
  • Going into 2H17, we have observed a slight uptick in interest rate as well as slight widening of the 2x10 spread. We continue to hold our view of a 25bp rate hike in end-17, and another three in 2018.
  • In terms of valuations, S-REITs are trading around historical averages, at 5.9% current dividend yield (vs. long term average of 5.8%) and 1.04x P/BV (vs. long term average of 1.03x). In terms of yield spread, it is trading at 380bp spread vs. long term average of 330bp.
  • From this exercise, we identified AREIT, FEHT and KDCREIT as most likely to undertake accretive-acquisitions from now till end-17. Given their healthy balance sheets, we believe that the funding structures for their respective acquisitions would be skewed towards debt. The implications for investors are twofold. 
    • Firstly, if investors want to increase their weightage in REITs, these are the names that could have near-term catalysts. 
    • Secondly, if investors want to decrease their exposure in the sector or rotate among REIT names, these are the names which we would advise them to remain vested in.
  • Otherwise, from a total returns perspective, our preferred picks in the sector remain MAGIC and PREIT. We maintain our Add call on MAGIC on expectations of better Hong Kong retail performance. We continue to like PREIT for its earnings stability, resilient rent structure and downside protection for 95% of its gross revenue.


Highlighted companies 


Ascendas REIT - HOLD, TP S$2.71

  • We expect AREIT to redeploy capital after recent divestments. In the near-term, we believe the trust could enhance its market share in Singapore business parks.

Far East Hospitality Trust - HOLD, TP S$0.66

  • We believe that FEHT is highly likely to acquire sponsor’s Oasia Hotel Downtown by year-end. We understand that the asset has stabilised and the REIT manager could lean towards debt to fund the acquisition.

Keppel DC REIT - HOLD, TP S$1.28

  • After a quiet 1H17, we expect KDCREIT to acquire overseas assets to meet its AUM target of S$2bn by FY18. We note that acquisitions in 2016 were mostly in 4Q.







YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-08-31
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.710 Same 2.710
HOLD Maintain HOLD 0.660 Same 0.660
HOLD Maintain HOLD 1.280 Same 1.280



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