SREIT Industrial sub-sector - Phillip Securities 2016-08-12: Brace for a wave of negative rental reversions

SREIT - Phillip Securities 2016-08-12: Industrial sub-sector: Brace for a wave of negative rental reversions KEPPEL DC REIT AJBU.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI CACHE LOGISTICS TRUST K2LU.SI SOILBUILD BUSINESS SPACE REIT SV3U.SI

SREIT - Industrial sub-sector: Brace for a wave of negative rental reversions

  • Both sector-wide occupancy and rental fell quarter-on-quarter and year-on-year.
  • Sector's Rental Index has fallen to 2012 levels, implying negative reversions going forward.
  • Factory space will be hardest hit in 2H 2016 with an onslaught of new supply.
  • 2017 going to be worse than 2016 for Warehouse space.
  • Business Park space should remain relatively unscathed.
  • "Underweight" on the Industrial sub-sector due to overwhelming new supply of space, without commensurate demand.
  • Tactical exposure through REITs with strong underlying demand drivers and ability to ride out the oversupply situation; wary of REITs facing significant portfolio exposure to master lease expiries
  • Maintaining our "Equal Weight " view on the overall S-REITs sector. 

What is the news?

Leasing market remains soft; even Data Centre segment saw weakness 

  • Generally negative reversions across the Industrial REITs, as oversupply condition persists. Even the Data Centre segment was not spared – Keppel DC REIT gave a negative reversion incentive, albeit on a forward renewal to a major customer that expanded its space requirement. 
  • Exceptions of positive portfolio weighted average reversions during the quarter came from Ascendas REIT (+4%) with Mapletree Industrial Trust (+0.5%) lagging behind.

Tenant retention is paramount 

  • We heard feedback from the REIT Managers that the key focus in the current soft market conditions is tenant retention. One Manager recounted an instance where it had a prospective tenant in late stage of negotiations and was eventually undercut by the tenant's existing landlord.

Tenants are opting for shorter leases and not willing to commit to forward renewals 

  • Tenants are facing an uncertain outlook for their businesses and landlords are also allowing shorter lease to maintain occupancy – all in an effort to cushion the effects of the soft leasing market. Landlords are also resorting to leasing out partial units for short-term lease.

Investment Actions 

  • We maintain our "Equal Weight" view on the overall S-REITs sector, from our most recent sector report (dated: 18 July 2016). 
  • We hold an "Underweight" view on the Industrial sub-sector within the S-REITs sector in view of weak demand and onslaught of new supply.

Cache Logistics Trust – Cautious over the possible overhang of Warehouse space.

  • We upgraded our rating from "Reduce" to "Neutral" in our results report on 25 July.
  • Our analysis suggests that the situation for Warehouse space in 2017 will be worse than 2016.
  • 25% of leases by gross rental income (GRI) expiring in FY18, substantially from the master lease of CWT Commodity Hub.
  • We forecast 8.03/7.14 cents Distribution per unit (DPU) for FY16e/FY17e, which is 1%/11% lower than consensus expectations of 8.1/8.0 cents. 

Keppel DC REIT – Proxy to explosive growth in data requirements.

  • We maintain our "Neutral" rating from our results report on 19 July.
  • Price has appreciated c.12% post-Brexit and valuations appear stretched at 1.3x P/NAV.
  • Positive catalyst: impending acquisition of Keppel DC Singapore 3 (formerly known as T27) in 3Q FY16.
  • We forecast 6.63/6.38 cents DPU for FY16e/FY17e, which is 4%/9% lower than consensus expectations of 6.9/7.0 cents.
  • We believe that consensus has not fully factored in the trend of GBP, AUD and MYR depreciating relative to SGD. 

Mapletree Industrial Trust – DPU growth from pipeline of build-to-suit (BTS) and asset enhancement initiative (AEI) projects.

  • We maintain our "Neutral" rating from our results report on 27 July.
  • Price has appreciated c.11% post-Brexit and valuations appear stretched at 1.3x P/NAV.
  • Hewlett-Packard BTS expected to contribute c.10% of portfolio GRI (Phase 1: 4Q 2016, Phase 2: 2Q 2017) and Kallang Basin 4 Cluster AEI due to be completed 1Q 2018.
  • Our analysis suggests that Factory spaces will be hardest hit in 2H 2016; c.57% by GRI of leases expiring in FY17 come from the Flatted Factories segment.
  • We forecast 11.08/11.50 cents DPU for FY17e/FY18e, which is in line with consensus expectations of 11.1/11.7 cents.

Soilbuild Business Space REIT (SBREIT) – Stability from master leases, and negligible vacancy risk for the rest of the year.

  • We maintain our "Accumulate" rating from our results report on 14 July.
  • No master leases expiring within the next two years; next master lease expiry will be for Solaris (23% of portfolio by GRI) in August 2018.
  • Negative catalyst: Default by tenant at 72 Loyang Way (Technics Offshore); may not be able to fully lease out property to multiple tenants.
  • Positive catalyst: announced acquisition of Bukit Batok Connection that is subject to Unitholder approval.
  • We forecast 6.11/5.99 cents DPU for FY16e/FY17e; this is 1%/6% lower than consensus expectations of 6.2/6.4 cents.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-08-12
Phillip Securities SGX Stock Analyst Report