Singapore REITs - RHB Securities 2015-09-01: Not Yet For Bottom-Fishing (Retail Sector)

Singapore REITs  Retail Sector 

Not Yet For Bottom-Fishing 

  • After a series of results reporting last month, we have reviewed the fundamentals of the SREITs sector space, and downgrade the sector to UNDERWEIGHT (from Neutral). 
  • In our highlights, we downgrade both the hospitality and office sub-sectors due to the unfavourable supply-demand within the respective sectors. 
  • Given the resilience of the retail segment, retail REITs is still our preferred segment, with our Top Pick being Frasers Centrepoint Trust. 

 Earnings results: four out of 13 miss. 

  • Two of the stocks that missed our forecasts were office REITs – Keppel REIT (KREIT SP, SELL, TP: SGD0.83) and Frasers Commercial Trust (FCOT SP, BUY, TP: SGD1.71), as both missed our DPU estimates mainly due to the weakening of AUD against the SGD. 
  • Similarly, both hospitality REITs under our coverage – CDL Hospitality Trusts (CDLHT SP, SELL, TP: SGD1.14) and OUE Hospitality Trust (OUEHT SP, SELL, TP: SGD0.73) had missed our DPU expectations mainly due to the sluggish tourism sector. 
  • Recently, prices have been on a downward spiral, resulting in a spike in the sector’s dividend yield to 7.3%. Given the pessimistic economic climate today, we expect prices to fall further until we see some resistance at 1SD level at 8.6% (global financial crisis: 15.1%), upon which we would look into re-rating the sector. 

Retail: Occupancy Levels Still Holding Up

Relatively strong performance from retail segment. 

  • The retail REITs have been relatively better performers, mainly driven by our Top Picks – Frasers Centepoint Trust and Starhill Global REIT (SGREIT SP, BUY, TP: SGD0.93). This is in spite of concerns over high tenant turnover and labour crunches. 
  • We think that the relative better performance by retail REITs is supported by the sector’s resilience as occupancy levels continue to be high, well above 95%. We also note that net property income (NPI) margins have remained high for the retail REITs, ranging from 69% to 80% within our retail REITs coverage. 

Stronger tenant sales and traffic flow for the quarter. 

  • In addition, we are encouraged by an improvement in consumer sentiment as we note an overall increase in traffic flow and tenant sales among the retail REITs. This is with an exception for Starhill Global REIT, as its core asset, Wisma Atria, is undergoing a repositioning. 

Positive rental reversion across all retail REITS. 

  • Despite softer rental reversion for the quarter, all retail REITs managed to book in healthy positive rental reversion. The highest positive rental reversion for the quarter was achieved by SPH REIT (SPHREIT SP, NR), as it booked in 9.2% rental reversion, mainly driven by its Orchard asset, Paragon. As we continue to see demand from retailers, especially from international retailers, we expect retail landlords to benefit from positive rental reversion, moving forward. 

High tenant turnover not a major concern for now. 

  • Given much concern over tenant churn within the retail scene, our team has been monitoring the retail occupancy rates very closely, and we conclude that the concerns over high tenant churns have not been well justified. Occupancy levels within our retail REITs coverage for the quarter remained high, from 96.5% to 98.2%. Should occupancy levels fall below 90%, this would then raise flags, as it would signify poor demand from tenants. 
  • In addition, the dip in occupancy levels in the recent quarters is not a concern, in our view, as the respective REIT managers are repositioning their malls, so as to remain attractive and relevant to target markets. 

Retail rental rates remained highly resilient. 

  • Lastly, we like the fact that rental rates at both Orchard and suburban malls have been very resilient. Given the favourable supply-demand dynamics, we expect rental rates to remain resilient, but with limited upside as demand should soften. Retail REITs stay our favourite sector. 
  • We continue to like Frasers Centrepoint Trust for its strong suburban resilience and strong moat within the northern region of Singapore. 
  • We also like CMT for it has the economic scale within the retail malls, and it is well-diversified across Singapore.
  • We maintain the segment at OVERWEIGHT, keeping Frasers Centrepoint Trust (FCT SP, BUY, TP: SGD2.22) and CapitaLand Mall Trust (CMT SP, BUY, TP: SGD2.42) as our Top Buy recommendations. 

Ivan Looi | Ong Kian Lin | http://www.rhbgroub.com/ RHB Securities 2015-09-01
BUY Maintain BUY 2.22 Same 2.22
BUY Maintain BUY 2.42 Same 2.42
BUY Maintain BUY 0.93 Same 0.93