Singapore REITs - DBS Research 2016-02-18: Aim for sustainability

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Singapore REITs - Aim for sustainability 

• S-REIT sector still in vogue as market volatility strikes, Picks A-REIT, MAGIC, MLT, FCT and CRCT. 
• DPUs continue to remain stable but boosted by capital returns 
• S-REITs should consider paying more of their management fees in cash to maintain long term stability 

S-REITs still in vogue as market volatility strikes. 

• With rate hike fears subsiding, we see S-REITs' current yield spread of 4.8% as attractive as it is above the 10- and 5-year average of 3.8% and 4.1%. Thus, we still see upside to share prices in the immediate tem. Our preference is for S-REITs with outsized yields and opportunities to surprise on the upside through acquisitions or with portfolios that continue to withstand operational uncertainties. 
• Our top picks are AREIT, MAGIC, MLT, FCT and CRCT. 

DPUs remain stable but some were boosted by capital retuns. 

• As expected, 4Q15 results showed cracks in the operating environment on the back of slowing business activities with retail REITs remaining the most stable. 
• We however note that several S-REITs have boosted DPU through capital distributions in 4Q15, which is timely in an environment where stable dividends are valued. However, we believe that the issue of sustainability will rise further given the weak operational growth outlook. 
• While we acknowledge that headline absolute yield still remains a key focus for investors in the near term, it comes at the expense of DPU sustainability which we believe is a more important metric in assessing a REIT’s long term viability. 

S-REITs should consider paying a higher proportion of fees in cash to maintain sustainability. 

• A regular feature amongst S-REITs, the payment of management fees in the form of units has the benefit of aligning managers’ interests with unitholders. 
• However, we do see potential issues going forward if S-REIT managers continue to maintain its current structure of paying a substantial portion of its fees in units. This is because most REITs are trading below their respective NAVs, coupled with a modest DPU growth profile, the continued issuance of new units will have the unintended consequence of eroding NAV per unit and diluting future DPU. 
• In a scenario analysis of S-REITs paying 100% of its fees in cash, we estimate a 0.5 percentage points drop in average sector yields to 6.5%, which is not all that bad, given that adjusted yield spreads of 4.3% remain above historical average. 
• S-REITs that are least affected in our scenario analysis are A-REIT, CMT, MINT, SGREIT, MLT, PREIT and KDC REIT which are already paying a substantial portion of their fees in cash.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-02-18

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