Singapore REITs Industrial sub-sector - Phillip Securities 2016-11-11: Watch for end-of-year revaluations

Singapore REITs Industrial sub-sector - Phillip Securities 2016-11-11: Watch for end-of-year revaluations CACHE LOGISTICS TRUST K2LU.SI SOILBUILD BUSINESS SPACE REIT SV3U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI KEPPEL DC REIT AJBU.SI

Singapore REITs Industrial sub-sector - Watch for end-of-year revaluations

  • Both sector-wide occupancy and rental fell quarter-on-quarter and year-on-year.
  • Sector's Rental Index has fallen to 2012 levels, with rental reversions likely to extend into negative double-digits.
  • Multiple-user Factory and Warehouse rental reversions already at negative double-digits and could worsen with the pipeline of new supply.
  • Factory space will be hardest hit in 4Q 2016 with an onslaught of new supply.
  • 2017 going to be worse than 2016 for Warehouse space.
  • Slight negative bias for Business Park rental reversions are on the cards.
  • Lower rents could lead to lower end-of-year valuations, resulting in higher gearing.
  • "Underweight" on the Industrial sub-sector due to overwhelming new supply of space.
  • Maintaining our "Equal Weight" view on the overall S-REITs sector.

What Is The News?

Key takeaways from the quarter

  • 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 -8% reversion to a large client at Keppel DC Singapore 2. 
  • Exceptions of positive portfolio weighted average rental reversions during the quarter came from Ascendas REIT (+0.9%) with Mapletree Industrial Trust (+0.7%) lagging behind. 

Tenant retention is paramount 

  • As with previous quarters, the situation with tenant retention remains unchanged. 
  • REIT Managers continue to focus on tenant retention amid the soft leasing environment. One Manager commented that "it is easier to retain a tenant, than to look for a new one".

Mindful of downward revaluation of properties 

  • Cache Logistics Trust experienced a downward revaluation for its property at 51 Alps Avenue, triggered by a tenancy contractual dispute. The property was revalued downwards by c.31%, losing 4.0 cents in net asset value (NAV) per Unit and pushing gearing to 41.2% from 39.8%. 
  • Other ongoing tenant dispute among the Industrial SREITs is at Soilbuild Business Space REIT; bearing in mind that the fiscal year-end revaluation for the REIT's portfolio will be in December. 
  • Other obvious candidates for downward revaluation are properties that were converted from a master lease to multi-tenancy lease.

Investment Actions 

  • Our "Equal Weight" view on the overall S-REITs sector remains unchanged, and we maintain our "Underweight" view on the Industrial sub-sector.

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

  • Maintain "Reduce" rating from our results report on 24 October.
  • Our analysis suggests that the situation for Warehouse space in 2017 will be worse than 2016.
  • Concentrated exposure of 27% of leases by gross rental income (GRI) expiring in FY18, majority from the master lease of CWT Commodity Hub.
  • Ongoing rental dispute with Schenker Singapore Pte Ltd resulted in downward fair value adjustment of 51 Alps Avenue property from S$116.8 million to S$80.7 million.
  • Possibility of further downward revaluation if outcome from the Court proceedings is unfavourable.
  • We forecast 7.58/6.69 cents Distribution per unit (DPU) for FY16e/FY17e, which is 5.3%/14.2% lower than consensus expectations of 8.0/7.8 cents. 

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

  • Maintain "Accumulate" rating from our results report on 12 October.
  • Completed the acquisition of a shell and core data centre in Cardiff, Wales in October.
  • Ongoing acquisition of shell and core data centre in Milan, Italy announced in August.
  • Ongoing acquisition of 90% interest in Keppel DC Singapore 3 (formerly known as T27) from Sponsor, targeted by December.
  • We forecast 6.96/7.45 cents DPU for FY16e/FY17e, which is 5.4%/2.1% higher than consensus expectations of 6.6/7.3 cents 

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

  • Maintained "Neutral" rating from our results report on 25 October.
  • Phase One of Hewlett-Packard BTS has obtained its Temporary Occupation Permit (TOP) in October, with Phase Two TOP expected six months later.
  • Kallang Basin 4 Cluster AEI due to be completed 1Q 2018; currently 0% pre-committed.
  • We are mindful of the 32.8% of leases expiring in FY18 in an oversupply landscape; about half of the leases expiring in FY18 come from the Flatted Factories segment.
  • We forecast 11.14/11.59 cents DPU for FY17e/FY18e, which is in line with consensus expectations of 11.1/11.9 cents.

Soilbuild Business Space REIT (SBREIT) – Stability from master leases, but weighed down by concerns from Technics Offshore property

  • We maintain our "Neutral" rating from our results report on 13 October.
  • No master leases expiring in 2017; next master lease expiry will be for Solaris (20% of portfolio by GRI) in August 2018.
  • Concentration risk as Technics Offshore contributes c.7.6% of portfolio GRI.
  • Possibility of downward revaluation for the property if it is converted to multi-tenancy lease.
  • We forecast 6.08/5.95 cents DPU for FY16e/FY17e; this is 0.3%/5.6% lower than consensus expectations of 6.1/6.3 cents.

Richard Leow CFTe Phillip Securities | 2016-11-11
Phillip Securities SGX Stock Analyst Report