Singapore REITs - Maybank Kim Eng 2016-05-17: Canaries in the coal mine

Singapore REITs - Maybank Kim Eng 2016-05-17: Canaries in the coal mine SREIT ASCENDAS REAL ESTATE INV TRUST A17U.SI  MAPLETREE INDUSTRIAL TRUST ME8U.SI 

Singapore REITs - Canaries in the coal mine 

1Q16 results: organic weakness 

  • SREITs under coverage saw their core-DPUs grow just 0.8% YoY for 1Q16, tapering from previous quarters of 2.4-3.9% YoY. 
  • Organic growth was challenging as average occupancy fell 0.6% YoY and 0.7% QoQ, and rent reversions have steadily tapered from mid-teens (1Q14) to 7% (1Q16), offsetting growth from acquisitions. 
  • As with our 12 Apr 16 sector report, we remain NEUTRAL on SREITs, mindful that despite uncertain fundamentals, lofty valuations are well supported by a low interest rate environment, suppressed bond yields and by extension, SREIT yields. 
  • Top Picks are MINT and AREIT. 
  • 2016 is going to be tough all over: retail, office or industrial. But the supply story brightens for industrials in 2017, ahead of the former two sectors. 

Retail: OCR resilient, CR hard going 

  • Average DPU growth was 1.4% YoY, tapering from 1.8-4.5% in previous quarters. 
  • Sector occupancy fell 0.7/0.5 ppts YoY/QoQ. 
  • CT’s 1.9% YoY DPU growth was decent due to Bedok Mall’s inclusion, but revenue/NPI fell on a same-mall basis, pulled down by malls in the Central Region (CR). 
  • FCT did better on a same-mall basis, but the overall result was hampered by Northpoint’s AEI as it prepares itself to be integrated. 
  • In general, Outside Central Region (OCR) malls faired better than CR malls; this can be seen in CT’s and FCT’s individual mall performances. 
  • SGREIT’s Orchard mall, Wisma, clearly is being affected by the lack of tourist spend. What surprises us is that the pickup in visitor arrivals is not having a visible effect on Orchard malls. 
  • We remain negative on Retail SREITs mainly on valuation grounds: too high for too little growth. 

Office: canaries in the coal mine chirping away 

  • The upcoming supply deluge is having a more profound effect on Grade A in non-prime locations vs prime locations, vis-à-vis MCT’s office and SUN’s office occupancies both suffered YoY and QoQ dips while CCT’s and KREIT’s were largely unscathed. 
  • Overall, sector coverage occupancy dipped 0.3% YoY and 1.1% QoQ. 
  • We do detect as well that signed rents could be lower as topline revenues declined for CCT and KREIT, as did MCT’s office revenues. 
  • We are cautious regarding the office outlook as weaker operating metrics in the non-prime located Grade As could be the canaries in the coal mine. 
  • Adjusting for capital distributions, sector DPU would have declined 0.5% YoY. 

Industrials: hanging on for next year 

  • 1Q16 showed eye-catching 14% YoY revenue growth, with core-DPU growing 1.3% after adjusting for AREIT’s accumulated taxes. But this was mainly due to acquisitions by AREIT and CACHE. Only MINT showed impressive organic growth from occupancy changes YoY. 
  • Sector wise, on a same-asset basis, we get the sense things would have been very flat. Sector occupancy, was down 0.8/0.6 ppts YoY/QoQ. 
  • Our optimism on industrial SREITs stems not from 2016, but 2017 when the supply outlook tightens overall, especially for business parks. 
  • AREIT is a Top Pick on this note. 
  • MINT remains for us a key REIT to hold as new assets in 2017 give high visibility to DPU growth ahead. 
  • AAREIT also holds promise from new assets kicking in next year, albeit with some transitional risks in 2016 as CWT is likely not to renew 20 Gulway.

SREITs Peer Comparison 

Joshua Tan Maybank Kim Eng | Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-17
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.78 Same 1.78
BUY Maintain BUY 2.57 Same 2.57