REIT - CIMB Research 2016-03-06: Sieving The Outperformers For 2016

REIT - CIMB Research 2016-03-06: Sieving The Outperformers For 2016 OUE HOSPITALITY TRUST Sk7.SI  MAPLETREE LOGISTICS TRUST M44U.SI  PARKWAYLIFE REIT C2PU.SI  CACHE LOGISTICS TRUST K2LU.SI  CDL HOSPITALITY TRUSTS J85.SI 

REIT - SIEVING THE OUTPERFOMERS FOR 2016 


■ Stock selection: we like KDC REIT, K-REIT & MAGIC 

  • We would prefer S-REITs with good income visibility, those exposed to sector fundamentals that support DPU growth and low gearing. Our preferred picks in the sector are KDC REIT, MAGIC and KREIT. 
  • Additionally, with the recent run-up in share prices of the big caps, we would advocate a rotation into mid-cap stocks which offer relatively better value. 
  • Having witnessed the recent run-up in CCT, CT and AREIT, we recommend investors switch into K-REIT, FCT and MLT respectively. 
  • We downgrade CCT, CT and AREIT from Add to Hold. We detail the investment cases for the various stocks in the following paragraphs. 


■ OFFICE OUTLOOK 

  • Looking into the next 12 months, we project office REIT DPUs growing by 5.1% yoy for two reasons – positive rental reversions in 1H16 and new contributions from acquisitions such as FCOT’s 357 Collins St in Australia and a full year’s contributions from OUECT’s purchase of a majority stake in One Raffles Place. From an organic growth perspective, CCT’s and K-REIT’s DPU would expand by a marginal 0.6-1.1% before declining in FY17 due to negative rental reversions. 
  • According to URA statistics, there was a net take up of 667,368sf of office space in 2015, after a net negative absorption of 107,640sf in 4Q15. Office rents dipped 6.5% yoy in 2015 while office values slipped a marginal 0.1% yoy. Island-wide occupancy was at 90.5%. With a slew of new completions expected in 2016, we anticipate the rental market to remain very competitive. We expect market rents to dip by 10% this year. As most of our coverage’s rents are 10-15% below current market levels, we expect these renewals to be neutral to earnings in 2016. 
  • Given the competitive rental market, we view that relocation demand for 2016 would be low as office landlords adopt an aggressive tenant retention approach, thus lending more pressure onto rental rates. 
  • That said, office REITs have fairly limited space up for renewals in 2016. For example, CCT has 7% of its gross rental income (GRI) to be re-contracted, while 7.6% of FCOT’s GRI are up for renewal. 15.1% of OUECT’s GRI is due for renewal in 2016, with most of renewals coming from One Raffles Place. We understand that the REIT is looking to sign up an anchor tenant for the asset, which would have spillover effects of anchoring the other smaller tenants. Lastly, KREIT has 16.7% of its net lettable area (NLA) to be re-contracted. It is in advanced negotiations for these leases and guided that it is likely to achieve a high retention rate. 

■ Downgrade CCT to Hold after run-up, switch to K-REIT 

  • In terms of stock selection, CCT’s share price had a sharp 14% run-up in the last one month. We think the share price movement is also a reflection of being included as a component stock in the STI. At present, the stock is trading at sub-6% FY16 yield and at 0.86x P/BV. With a murky outlook on the office rental market over the next two years and the effect of negative rental reversions showing up in earnings projections in FY17, we believe upside from here is capped. We downgrade the stock to Hold from Add with an unchanged target price of S$1.48
  • We believe K-REIT would offer a more attractive alternative for office exposure. The stock is trading at a 7% FY16 DPU yield (excluding divestment gain from 77 Kings St). We maintain Add with an unchanged target price of S$1.08. Catalysts could come from successful tenant retention as the trust has 16.7% of leases to be re-contracted in 2016. K-REIT is also now one of our top picks in the REIT sector. 


■ RETAIL OUTLOOK 

  • We project that retail S-REITs’ DPU will rise by 2.4% yoy in 2016. Organic income growth is likely to be moderated by anaemic rental reversions and lower occupancies, as major REITs such as FCT and CT embark on AEIs. FCT projects that Northpoint’s occupancy will decline from above 90% presently to an average of 75% in 2016, as it reconfigures the property over the next 18 months to ensure seamlessly integration with the upcoming Northpoint City. While we expect this exercise to draw positive returns in the medium term, short-term earnings growth prospects are likely to be moderate during the reconfiguration exercise. 
  • CT plans to redevelop Funan IT Mall to take advantage of the additional commercial GFA. It plans to close Funan Mall towards the middle of 2016. Although the property is small, accounting for 2-3% of FY15 revenue, the income vacuum is likely to drag on the REIT’s overall growth prospects in the near term. The additional contribution from redevelopment is only likely to materialise in the medium term. 

■ Rotate out of CT to FCT 

  • In the meantime, CT’s share price has outperformed those of its peers, with an 11% run-up since the beginning of this year. At present, the stock is trading at a forward 5.1% yield, on par with its long-term average yield. We think that valuations are becoming a little rich, given the more moderate rental growth outlook for the retail sector and expected slower portfolio income growth during the Funan IT Mall redevelopment period. Thus, we lower our call from Add to Hold, with an unchanged DDM-based target price of S$2.15. CT is no longer one of our top picks for the REIT sector. 
  • On the other hand, FCT has lagged its peers slightly, trading at a forward 6% yield versus its long-term average yield of 6.1-6.2%. We recommend that investors rotate out of CT to FCT. We maintain Add on the stock, with an unchanged DDM-based target price of S$2.07. Catalysts could come from stronger rental reversions and higher occupancy at Bedok Point. 
  • As for MCT, we think that its rental renewals will remain attractive and have imputed low-teens reversions over pcp for the upcoming renewal of c.24% of its leases in 2016. However, at 5.7% FY17 yield (midway between post-Global Financial Crisis average and 1 s.d. above average dividend yield), we think that most of these positives have been priced in and retain our Hold rating on the stock. 


■ INDUSTRIAL OUTLOOK 

  • We forecast that industrial S-REITs’ DPU will increase by 2.8% yoy in 2016. Guidance during the 4Q15 results briefings was unequivocal – the respective managements expect flattish or single-digit rental reversions in 2016. For example, AREIT’s average passing rents for leases due for renewal in FY16/17 are close to market rents. Given that warehouse is the most oversupplied of all the industrial sub-segments, we expect warehouse rents to decline by up to 5% p.a. over 2016-17. 
  • We expect KDC REIT to achieve the highest DPU growth in the industrial sector of 7.5% in FY15, driven by its built-in rental escalations of 2-4% p.a. We like KDC REIT as it is a unique pure-play data centre REIT in Asia Pacific, where we expect healthy demand. The increasing digitisation of the global economy is expected to drive growth in data creation and storage needs. We maintain our Add recommendation on the stock, with an unchanged DDM-based target price of S$1.18. It remains one of our top picks for the sector. 
  • Potential re-rating catalysts include accretive acquisitions and higher-than-expected rental reversions. 

Rotate out of AREIT to MLT; downgrade Cache from Add to Hold 

  • We project that AREIT will achieve the second-highest DPU growth in the sector of 5.9% yoy in FY15/16F, as full-year contribution from its Australian portfolio flows in. However, given the recent rally in its share price, we recommend that investors rotate out of AREIT to MLT. We downgrade AREIT from Add to Hold, with a slightly lower DDM-based target price of S$2.41 (previously S$2.42). We suggest that a suitable re-entry price would be S$2.27 or 1.1x P/BV (1 s.d. below the stock’s historical trading average). 
  • In the interim, we see c.8% share price upside for MLT, which has been a laggard amid the positivity propping up the sector. However, we cut our DDM-based target price to S$1.06 (previously S$1.17) as we factor in a higher equity discount rate for the stock, in line with the sector realignment. We maintain Add, with potential catalysts coming from stronger performance in Hong Kong and China, as well as inorganic growth via its sponsor’s extensive pipeline. 
  • For 2016, we expect the logistics REITs to focus on portfolio stability and tenant retention, as SUAs are converted to MTBs. We see downside risks for Cache, as two master leases (Schenker Megahub and Hi-Speed Logistics Centre) are up for renewal in 2016, and there is high likelihood that the two properties will be converted to MTBs. This would result in margin pressure. Hence, we downgrade the stock from Add to Hold, with a lower DDM-based target price of S$0.95 (previously S$1.08)
  • Similarly, we think that there could be some volatility for Cambridge as its lease expiries will peak in 2016. Given its larger and more diversified portfolio, we think that MLT is not as prone to conversion risks. 


■ HOSPITALITY OUTLOOK 

  • Based on our projections, hospitality S-REITs will deliver 0.5% DPU growth in 2016. Unsurprisingly, we have Hold ratings for all the hospitality REITs under our coverage and shy away from the sub-sector. We expect RevPAR to trend down by 5-10% over 2016-17, and view the depressed RevPARs as dampeners on share price performance. 
  • We estimate that an additional 3,919 rooms or 6.3% of total stock will come onstream by end-2016. In contrast, the Singapore Tourism Board (STB) projects visitor arrivals in the range of 15.2m-15.7m for 2016 or 0-3% yoy growth. That said, we expect RevPAR for the luxury and upscale segments to hold up better than for the lower end of the market, as most of the new supply is concentrated in the mid-tier and economy segments. Notable names that are part of the new supply are Oasia Downtown Hotel, Sofitel Singapore City Centre, Mercure Singapore and Holiday inn Express Katong. 

Downgrade OUEHT from Add to Hold 

  • If investors want exposure to the hospitality sub-sector, we advise them to take a position in ART. We forecast 0.2% yoy growth in DPU for ART in 2016. We like the REIT for its diversified global portfolio, which would provide income stability. Furthermore, serviced residences that focus on the long-stay segment are not as exposed to the supply glut. 
  • Our second top pick in the sub-sector is FEHT. Although we project a 2.2% yoy decline in DPU in 2016, we are encouraged by the trust’s proactive approach to bolster occupancy, which resulted in a slower decline in RevPAR vs. peers in 2015. 
  • Given the continued weakness in Singapore and Maldives, we rank CDLHT as our third choice. We forecast a 3.5% yoy fall in DPU in 2016. 
  • Lastly, we downgrade OUEHT from Add to Hold and lower our DDM-based target price to S$0.77 (previously S$0.98) as we factor in a higher equity discount rate for the stock, in line with the sector’s realignment. We have also incorporated more dilutive equity fund raising (EFR) assumptions, with proceeds to be used to fund the acquisition of Crowne Plaza Changi Airport Extension (S$205m capex) and to pare down gearing to 40% by end-2016 (end-2015: 42%). Nonetheless, we expect OUEHT to achieve the strongest DPU growth among the hospitality REITs (+5.4% for 2016, driven by the fullyear contribution of Crowne Plaza Changi Airport and partial contribution from Crowne Plaza Changi Airport Extension). However, we believe that the impending EFR could cause share overhang. 


■ OVERSEAS OUTLOOK 

  • Overseas REITs continue to enjoy the benefits of new acquisitions, as well as stronger organic growth prospects, with a projected 5.7% DPU growth in 2016 (based on our estimates). We expect MAGIC to continue enjoying positive rental reversion from Festival Walk, while a full-year’s contribution from Sandhill Plaza will boost earnings. IREIT, which recently acquired Canard Park in Berlin, is also expected to see higher yoy earnings in 2016, with the additional income stream from this property. Management highlighted that 80% of its FY16 earnings are hedged and thus, income visibility remains strong. CRCT should continue to benefit from positive rental reversions from its malls in China, in our view. 
  • Our top pick in this segment is MAGIC, with FY16/17 DPU yields of 8.0-8.2%. We maintain Add, with an unchanged DDM-based target price of S$1.10. Potential catalysts include continued strong performance of Festival Walk. 


■ HEALTHCARE OUTLOOK 

  • Given that the healthcare REITs’ rental structures are pegged to CPI or a percentage of operational growth, investors can be assured of strong and resilient earnings. Excluding divestment gains, we expect this sub-sector to deliver DPU growth of 3% in 2016, backed by organic income growth (for PLife and RHT), as well as inorganic growth (FIRT). FIRT will enjoy a full-year contributions from Siloam Hospitals Kupang and Lippo Plaza Kupang and it recently announced the proposed acquisition of Siloam Yogyakarta. 
  • Our top pick in this segment is PREIT for its strong rental structure that is pegged to CPI growth (in Singapore) or rental agreements that have market revision every 3-5 years, with downside protection (in Japan). In addition, it had healthy gearing of 35.3% at end-Dec 2015 and no refinancing due in 2016. Hence, the REIT is well placed to seek further acquisitions in the region, namely in Singapore, Malaysia or Japan. The stock is trading at 5.1-5.3% FY16/17 DPU yield, midway between its average dividend yield and 1 s.d. above average. We maintain an Add call, with a slightly lower DDM-based target price of S$2.54 (realigned equity discount). Further yield-accretive acquisitions could catalyse the stock



YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-03-06
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 0.91 Down 1.09
ADD Maintain ADD 1.06 Down 1.17
HOLD Downgrade ADD 0.98 Down 0.77
ADD Maintain ADD 2.54 Down 2.56


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