Singapore Industrial REITs - Phillip Securities 2018-02-12: Tailwind Of Tapering New Supply This Year

Singapore Industrial REITs - Phillip Securities 2018-02-12: Tailwind Of Tapering New Supply This Year Singapore Industrial REITs Review Industrial SREIT Recommendation ASCENDAS REAL ESTATE INV TRUST A17U.SI CACHE LOGISTICS TRUST K2LU.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI KEPPEL DC REIT AJBU.SI

Singapore Industrial REITs - Tailwind Of Tapering New Supply This Year

  • Maintain Equal Weight view on Industrial REITs sub-sector. 
  • Sector occupancy ticked up q-o-q, driven by take-up of newly completed warehouse space. However, sector occupancy was lower y-o-y.
  • Rental Index across the board yet to bottom, but Business Park rental made new high. 
  • Tapering of new supply in 2018 leads us to believe rents to bottom by end of this year.

What Is The News?

Key takeaways from the quarter 

➕ More leasing follow-ups, and managers are more selective on tenants 

  • Unchanged from previous quarter, managers generally gave feedback that they are seeing more enquires compared to a year ago. However, it is still taking time for enquiries to convert into actual transactions. Managers are still actively engaging tenants to maintain occupancy, as it is a tenant's market. 
  • Demand is coming from trade sectors such as transport and storage, IT, precision engineering and food and beverages. We also hear managers emphasising on tenant credit quality.

➕ Expansion of investment mandates by MINT and SBREIT 

➕ ESR-REIT proposed a merger with VIT by way of acquisition 

➖ Negative reversions to persist in 2018, managers expect rents to bottom in 2018 

  • Industrial S-REITs generally reported negative renewal rates in 4Q 2017, with the exception of Ascendas REIT (A-REIT, +5.8% renewal for Singapore portfolio) and Mapletree Logistics Trust (MLT, +4.5% renewal for Singapore portfolio). 
  • Our view remains unchanged for negative reversions to persist in 2018, and we believe rents to bottom only by the end of 2018. Industrial REIT managers are expressing varying degrees of optimism – some believe rents to bottom in 1H 2018, while others believe it to bottom in 2H 2018.

➖ Revaluation losses on the back of soft rents 

Investment Actions 

We maintain our "Equal Weight" view on the Industrial sub-sector.

  • The tailwinds for the sector are the tapering of supply of Industrial space in 2018. In line with the robust industrial activity, 4Q 2017 Rental Index occupancy was higher q-o-q, albeit driven by Warehouse segment only, and Business Park segment to a lesser extent. The uncertainty is the exact bottom for rents, but we believe it to be by end-2018. 
  • Negative reversions also likely to persist in 2018, in view of the higher Rental Index from three years ago. 
  • We would like to see a broad based improvement in occupancy, in order to upgrade our sector view for Industrial REITs.

Strategic Top-down View (unchanged from previous quarter) 

Maintain exposure to Business & Science Park properties and Hi-Tech/Hi-Specification buildings 

  • Singapore is evolving towards higher value-added manufacturing and there is a push with the Smart Nation initiative. 
  • We like REITs that can capture this opportunity with Business & Science Park properties and Hi-Tech/Hi-Specification buildings. At the same time, Business & Science Park rents are expected to be stable, underpinned by limited new supply.

Key points for the REITs under our coverage 

Ascendas REIT – The stable giant 

  • Portfolio occupancy remains high at 91.1% with healthy WALE of 4.2 years.
  • 57% of A-REIT's Net property income is derived from Business Park and Hi-Specs properties in Singapore.
  • Contribution from recent acquisitions able to buffer the 5.1% of Singapore NLA that is up for renewal in 4Q FY17/18.

Cache Logistics Trust – Fuelled and ready 

  • Acquiring a portfolio of nine logistics properties in Australia, funded by a combination of debt and perpetual securities.
  • Estimated gearing will be 35.8% after the acquisition of the nine properties and divestment of 40 Alps Ave (divestment proceeds will be used to repay debt).
  • Key downside risk of CWT Commodity Hub (26% by portfolio value as at FY17) master lease expiry, has been partially mitigated with pre-commitment from underlying tenants for two-thirds of NLA.

Mapletree Industrial Trust – Tech-ing up with overseas data centres 

  • JV of 14 data centres in the US started contributing, increasing income exposure to HiTech Buildings and also diversifying outside of Singapore.
  • Kallang AEI (12% pre-committed) and data centre build to suit coming on stream in 2018 to contribute positively.
  • Uncompelling valuation at implied 1.48 times FY18e P/NAV multiple.

Keppel DC REIT – Specific exposure to a unique asset class 

  • Keppel DC Dublin 2 (acquired in September 2017) and maincubes Data Centre (expected 2Q18) to contribute positively in 2018.
  • Manager is working towards achieving S$2bn AUM target in 2018.
  • Valuation appears to be rich at an implied 1.45 times FY18e P/NAV multiple.

Richard Leow CFA Phillip Securities | https://www.stocksbnb.com/ 2018-02-12
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.890 Same 2.890
ACCUMULATE Maintain ACCUMULATE 0.930 Same 0.930
NEUTRAL Maintain NEUTRAL 2.150 Same 2.150
NEUTRAL Maintain NEUTRAL 1.470 Same 1.470