Singapore REITs - OCBC Investment 2016-03-11: Still Weathering the Storm


Singapore REITs - Still Weathering the Storm 

  • Weakness seen in hospitality sector 
  • Flight to safety 
  • FCT, KDCREIT and MLT our top picks 

S-REITs have proven to be a defensive haven 

  • It has been a tumultuous start to 2016 thus far, with heightened volatility seen in the equity and commodity markets. Notwithstanding the vagaries of the macroeconomic environment, we note that S-REITs, which are typically perceived as being more defensive in nature, have outperformed the broader market YTD. 
  • The FTSE ST REIT Index is up 3.2% YTD, versus the STI’s 2.6% decline. 
  • A further dissection on the returns of the individual S-REITs revealed that the larger cap blue-chip names have been the outperformers, which we believe reflects the “riskoff” approach adopted by the market. 
  • CapitaLand Mall Trust has seen the strongest share price appreciation YTD, followed by Mapletree Commercial Trust. Both REITs belong to the retail REITs category, which has been our preferred sub-sector within the S-REITs universe. 
  • The various REIT sub-sectors have also managed to exhibit resilient results during the recently concluded 4QCY15 earnings season, with the exception of hospitality REITs. 
  • Under our coverage, Ascott Residence Trust, CDL Hospitality Trusts, Far East Hospitality Trust and OUE Hospitality Trust all reported DPU which declined YoY, ranging from 3.8% to 8.6%. The drag came from the tightening of budgets by corporates, relatively strong SGD vis-à-vis the regional currencies and more intense competitive pressures underpinned by a higher hotel room supply. However, results were in-line with our expectations as we had tapered down our forecasts along the course of last year. 
  • The other 18 S-REITs which we cover recorded results which met our expectations. 
  • Overall DPU growth came in at 1.9% on a YoY basis. 
  • Despite subdued manufacturing data points in Singapore, industrial REITs managed to generate commendable performances. Results of Mapletree Logistics Trust and Soilbuild Business Space REIT were stable, while Ascendas REIT and Mapletree Industrial Trust registered healthy improvement in DPU. 
  • Retail REITs had the best showing, delivering YoY DPU growth of 4.4%, led by overseas-focused REITs. 

Slight increase in gearing ratio and cost of borrowing, but largely still manageable

  • Based on S-REITs under our coverage, we note that there was a slight increase in the average leverage ratio from 34.3% (as at 30 Sep 2015) to 34.8% (as at 31 Dec 2015). The average proportion of debt which has been fixed/hedged was 79.6% (as at end-4QCY15), versus 80.7% as at end-3QCY15, while average borrowing costs rose marginally from 2.9% to 3.0%. 
  • While these statistics represent a slight deterioration in fundamentals, we believe the situation remains manageable, and REIT managers will continue to exercise prudence in their capital management. 

Interest rate outlook more dovish as compared to last Dec 

  • Given concerns over the macroeconomic outlook, we note that expectations of another interest rate hike in the near-term have been tapered down. At the start of the year, the Fed fund futures had factored in a probability of 50.8% for a rate hike during the Mar FOMC meeting. 
  • Currently, the probability of this happening next week has fallen to just 4.0%. 

Stay NEUTRAL, selective stock picks preferred 

  • The FTSE ST REIT Index is currently trading at a forward yield spread of 477 bps against the Singapore Government 10-year bond yield. This is approximately 0.65 standard deviations higher than the 5-year average of 438 bps. 
  • While valuations are undemanding, in our view, we opt to stay NEUTRAL on the S-REITs sector given sector headwinds and likelihood of more volatility ahead. 
  • We believe a prudent bottom-up stock picking strategy remains key in this current backdrop. 
  • We keep Frasers Centrepoint Trust [BUY; FV: S$2.25] and Keppel DC REIT [BUY; FV: S$1.24] as our top ‘Buy’ ideas. 
  • Following our downgrade of CapitaLand Mall Trust [HOLD; FV: S$2.10] on 3 Mar 2016 given its stellar share price performance, we replace it with Mapletree Logistics Trust [BUY; S$1.04] as our other preferred sector pick.

Wong Teck Ching Andy OCBC Investment | http://www.ocbcresearch.com/ 2016-03-11
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 2.10 Same 2.10
BUY Maintain BUY 2.25 Same 2.25
BUY Maintain BUY 1.24 Same 1.24
BUY Maintain BUY 1.04 Same 1.04