Singapore REITs - DBS Research 2018-03-19: The Bottom Is Near (Part 2 of 3)

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Singapore REITs - The Bottom Is Near (Part 1 of 3)


Singapore REITs - The Bottom Is Near (Part 2 of 3)

AIMSAMP Industrial Trust 

Industrial sector is turning around. 

  • The industrial sector has seen worse times. With supply for industrial space tapering off in 2018, management is seeing an easing of downside risk to rental reversions as leasing spreads (between passing rents and market levels) compress. 
  • The REIT is seeing more enquiries across the portfolio on the back of strong macroeconomic data, implying that firms are looking to expand and take up more space. This sets the tone for a gradual recovery in portfolio performance on a same-store basis while portfolio occupancy ramains stable.

Strategy to deliver value. 

  • Apart from pursuing third-party acquisitions, the Manager is focusing on delivering growth in distributions and net asset value (NAV) for unitholders by undertaking strategic developments and repositioning its properties for higher valued-added use (i.e. conversion of older factory property into modern warehouses, etc), crystallising value in the process. 
  • AIMSAMP have added more than 1.8m sqft of industrial space and S$28.6m in rental income (c.30% of FY17F top line). The portfolio continues to be under utilised with selected opportunities to extract a further c.600,000 sqft of space, representing a further c.9% increase in leasable area for the portfolio.

Master-lease expiry in 2018. 

  • The portfolio continues to deliver stable occupancies of close to 98% with c.18.3% of the income up for renewal in FY19. Master leases rolling off the leases contribute to only 3.3% of income expiring which is manageable, assuming non-renewal of the master tenancies.
  • While leasing spreads are still negative, the downside risk is abating as the year progresses.

Stable financial metrics. 

  • Financial metrics have been improving with recent equity fund raising, and gearing has dipped from 37.3% to 33.8%, at the lower end of its historical range.
  • Weighted average debt maturity stands at 2.1 years with interest cost at 3.6%, and 88.7% of the interest cost hedged into fixed rates.

CapitaLand Retail China Trust 

Portfolio with strong property attributes. 

  • CapitaLand Retail China Trust (CRCT) owns a diversified portfolio of 11 retail malls across key Tier 1 and Tier 2 cities in China, where operational outlook remain bright supported by strong economic fundamentals. Most of its malls are located at key transport nodes with a large population catchment, allowing the malls to enjoy strong pedestrian traffic and sales.
  • Nine out of the 11 malls are multi-tenanted which offer strong organic growth (88% of FY18F net property income (NPI)) with the remaining two master-leased malls providing the portfolio with income stability.

Healthy portfolio tenant sales. 

  • Over FY17, the portfolio achieved positive rental reversion of 5.6%, led by Xizhimen (7.7%), Wangjing (6.5%) and Saihan (10.2%). MZLY saw a positive reversion rate of 22.5% for 14% of its mall space renewed over the year.
  •  Growth in shopper traffic and tenant sales were 4.7% and 0.8% respectively, a sign that potential upside in rentals is justifiable.

Positioning portfolio towards growth. 

  • The Manager regularly reviews the portfolio and re-cycles capital through strategic divestments. Part of the recent sales proceeds from CapitaMall Anzhen (a master-leased property with limited rental upside), were re-deployed to the purchase of Rock Square (a property within the first-tier city of Guangzhou). 
  • With adequate debt headroom and the signal of a shift in focus to more actively managed assets, we believe more acquisitions are on the Manager’s radar in the near term.

Stable financial metrics. 

  • Financial metrics have been improving with recent equity fund raising, and gearing is expected to remain at a conservative 34% post acquisition of Rock Square.
  • With the Manager continuing to look to bulk up the portfolio, we have priced in an acquisition of S$250m in our estimates.
  • Cost of funds remain stable at c.2.48%. While refinancing costs may increase over time, we believe that the strong topline growth can compensate for the risk of rising interest rates.

Cromwell European REIT 

Leveraged to improving European economy. 

  • Cromwell European Real Estate Investment Trust (CERT) is a Singapore REIT with a diversified Pan-European portfolio that offers investors a unique opportunity to invest in office, light industrial/logistics and retail assets located in Denmark, Germany, France, Italy and Netherlands. 
  • It provides investors exposure to the continued economic recovery in Europe. In addition, unemployment rates are expected to fall further with household consumption, while investment and industrial production activities are expected to increase going forward.
  • Against this favourable macro backdrop, Cushman & Wakefield forecasts a steady increase in rents over the next three years.

Predominantly freehold or ongoing leasehold properties.

  • Approximately 88.0% of the initial portfolio by appraised value comprises either freehold land or ongoing leasehold land which are classified as continuing leasehold or perpetual leasehold. We find that this compares favourably with other Singapore REITs which predominantly hold properties with up to 99-year leaseholds.

Long dated lease expiry profile with diversified and high quality tenant base. 

  • CERT’s initial portfolio has a long weighted average lease expiry by headline rent based on the next permissible break date at the tenant’s election (WALE) and weighted average lease expiry by headline rent based on the final termination date of the lease agreement (WALT) of 4.9 and 5.8 years respectively. 
  • In our opinion, the long WALE and WALT provide strong medium-term income visibility and stability for the REIT.

Embedded rental escalations. 

  • The majority of CERT's leases are linked to inflation or similar indices which not only provide a built-in rental growth mechanism but also act as a natural hedge against potential rate hikes driven by rising inflation.

Prudent financial metrics. 

  • Financial metrics remain strong with the Manager taking on a conservative approach towards keeping gearing low and actively managing the REIT’s debt maturity profile. As of 4Q17, CERT's average debt maturity profile stood at 4.0 years with minimal refinancing risk every year. 
  • Average interest cost stood at 2.1% with c.86% of interest cost hedged into fixed rates, thereby minimising the impact of a rise in rates.

First REIT 

Resilient healthcare exposure. 

  • First REIT invests in a diversified portfolio of income-producing properties that cover the full scale of healthcare real estate, including hospitals, nursing homes, rehabilitation centres and other healthcare-related facilities. As of 4Q17, the portfolio comprised 20 properties valued at over S$1bn located in Indonesia (16 properties), Singapore (three properties) and South Korea (one property).
  • The Sponsor of the REIT is PT Lippo Karawaci Tbk, one of Indonesia’s largest property companies which operates Siloam Hospitals Group.

Acquisitions to drive earnings. 

  • First REIT completed the acquisitions of a numbre of properties in 4Q17 (Siloam Hospitals Yogyakarta and Siloam Hospitals Buton and Lippo Plaza Buton) for S$27.0m and S$28.5m respectively. Earnings growth will be driven largely by the full-year contribution from these two properties.
  • Rental income is stable and mainly backed by triple-net leases with fixed escalations offering strong income visibility. The REIT has minimal exchange rate risk with most of its income pegged to SGD.

Stable financial metrics. 

  • Financial metrics remain strong with a low gearing at 33.6%, despite drastic growth in portfolio value, distributable amount and DPU. As of 4Q2017, average interest cost stood at 3.7% with c.92% of interest cost hedged into fixed rates, thereby minimising the impact of rising interest rates.

Keppel REIT 

Singapore office on a multi-year recovery. 

  • We are entering a period of under-supply over 2018-2020 where annual supply of new office is < 1m sqft, below annual take-up. Hence, we believe that recovery in Grade A office rents is underway. However, we see a two-tier market led by premium Grade A offices while older Grade A and potentially Grade B buildings lag behind. This is because the “flight to quality” trend remains as tenants seek buildings with more efficient floor plates and specifications. Keppel REIT (KREIT), with one of the best-in-class office buildings in Singapore, will stand to benefit from this trend.
  • We believe the expected recovery in office rents should act as a catalyst to close the discount to KREIT’s book value of c.S$1.40. The earlier-than-expected upturn in spot rents should provide confidence that market rents should eventually recover to S$12-14 psf per month. 

Long weighted average lease expiry (WALE) offers long-term visibility. 

  • Despite the cyclical nature of the office market, KREIT provides a high degree of income stability. This arises as it has a long weighted average lease expiry (WALE) of c.6 years (nine years including the 311 Spencer Street acquisition). 
  • In addition, due to the prime locations of its office buildings, including the new CBD in the Marina Bay area, we believe KREIT’s offices will continue to command premium rents and remain attractive to prospective and current tenants. 

Gearing to rise back to 40% by 2019. 

  • With recent asset revaluation gains and the disposal of 77 King Street in Sydney, KREIT’s gearing is now at c.39%. Going forward, we expect gearing to inch back up to 40% by 2019 when its 311 Spencer Street project is completed. 
  • KREIT has a weighted average debt-to-expiry of around three years, with c.77% of debt on fixed rates. 

Continue reading >> Singapore REITs - The Bottom Is Near (Part 3 of 3)

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-03-19
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