REIT - CIMB Research 2016-11-03: 3Q16 Results Wrap-up ~ Slow Slide To Bottom

REIT - CIMB Research 2016-11-03: 3Q16 results wrap-up: slow slide to bottom Singapore REIT Singapore Business Trusts

REIT - 3Q16 results wrap-up: slow slide to bottom

  • The REITs’ 3Q16 results continued to display a slow slide to trough.
  • Downgraded AREIT, FIRT, FCOT & KREIT to Hold but upgraded CDREIT to Add.
  • Maintain Overweight. Our top picks are KDCREIT, MCT and MINT.

3Q16 results wrap-up: slow slide to bottom 

  • The majority of S-REITs have reported 3QCY16 results. Generally, the REITs continued to adopt a defensive tenant retention strategy at the expense of rents.
  • Occupancies were stable qoq, while the managers managed to eke out very mild positive rental reversion. FCOT’s and SUN’s DPU included capital top-ups.
  • Peeking into 2017, with the sector trading at historical mean, we believe that the call on S-REITs is a call on macro/interest rate. Hence, we could advise investors to shift to REITs with reasonable valuations and resilient income. Overweight maintained.

Industrial: big caps still resilient 

  • Owing to their size, scale and diversity, the industrial big caps delivered resilient 3Q16 results. That said, we sensed guidance turning cautious, with the managers warning of negative rental reversions.
  • During 3Q16, the limelight fell on KDCREIT (Add), which announced the acquisition of SGP 3 (fully funded by net proceeds of S$275m from preferential rights issue).
  • A notable call was our downgrade of AREIT to Hold, as we factored in the full conversion of the ECS. Despite the headwinds, MINT’s (Add) 2QFY17 DPU was up 1.4% yoy in 3Q16; while MLT’s (Hold) was flat. CACHE (Reduce) suffered a S$36m devalution loss from the Schenker property. CREIT’s (Hold) 3Q16 DPU fell 12% yoy (adjusted basis) due to higher property costs from more multi-tenanted properties.

Retail: as the cold winds blow 

  • We believe well-positioned malls or suburban malls integrated with major transport nodes will continue to withstand the cold winds of waning demand. This has been demonstrated by the portfolios of CT (Hold), FCT (Add), MCT (Add) and SPHREIT (Hold). SUN (Hold) and SGREIT (Hold) were affected by negative rental reversions.
  • Island-wide, overall vacancy rose to 8.4% at end-3Q16, the highest level since 1Q11.
  • URA’s property rental index fell at a slower pace of 1.5% qoq. We expect retail landlords to focus on F&B and retail-tainment/lifestyle offerings to combat the drop in consumers’ purchasing power.

Office: resultant vacancies at secondary offices to cap recovery

  • Boosted by the inorganic contribution of CapitaGreen and ORP, CCT (Add) and OUECT (Hold) registered yoy improvement in 3Q16 DPU. CCT announced plans to redevelop Golden Shoe Carpark. We downgraded both KREIT and FCOT to Hold on valuation. Both recorded yoy decline in quarterly DPU.
  • CCT, KREIT and SUN achieved very slight positive rent reversions in 3Q; while MCT’s MBC 1 (Mapletree Business City Phase 1) achieved +8.5% rent reversion.
  • Office leasing momentum picked up markedly in 3Q16, resulting in net absorption of 820k sq ft, a reversal from four consecutive quarters of contraction. Grade A office rents contracted at a slower pace of 2.1% qoq to S$9.30. That said, with leasing activities driven by relocations, we expect resultant vacancies at secondary offices to be a drag on overall vacancy and rent.

Hospitality: still challenging; 3Q16 slightly better than 2Q16

  • Hospitality REITs are still facing a very tough time, with steeper yoy RevPAR decline in 9M16 than in 2015. 3Q16 was slightly better than 2Q16, although we note that Oct was reportedly a bad month (but not as bad as Jun). Balanced against valuations, we see value in hospitality REITs, as long as 2017 RevPAR bottoms out.
  • On this basis, we turned positive on CDREIT (Add), which is trading close to its 52- week low. Meanwhile, OUEHT’s (Add) 3Q16 results were proof of earnings turnaround. ART (Hold) delivered yoy flat DPU on the back of mixed performance.

Peer Comparisons

CIMB Research - Singapore REITs Business Trusts Peer Comparison 2016-11-03

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-11-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.330 Same 1.330