Singapore REITs - DBS Research 2018-03-19: The Bottom Is Near (Part 1 of 3)

Singapore REITs - DBS Vickers 2018-03-19: The Bottom Is Near Singapore REITs Review S-REITs To Buy Now ASCENDAS REAL ESTATE INV TRUST A17U.SI ASCENDAS HOSPITALITY TRUST Q1P.SI

Singapore REITs - The Bottom Is Near

  • Fund flows expected to return to S-REITs.
  • Twin growth thrusts supported by improving fundamentals and potential acquisitions.
  • Interest cost largely hedged into fixed rates; sensitivity to interest rate hikes is mitigated.

Flows expected to return to S-REITs. 

  • We recently brought a group of Singapore REIT managers to an investor conference in Korea and Japan, followed by marketing to investors around the region. With the recent correction in share prices for the S-REITs, we are sensing that investors are looking for re-entry opportunities. 
  • Despite the risk of four rate hikes over 2018 (vs consensus estimates of three), we are sensing that investors are tempted to re-enter at lower prices, as yields have inched up by c.50bps to c.6.0% with upside surprise coming from an expected rebound in rental growth rates across most S-REITs. 
  • The strength of the SGD vs regional currencies is another key reason why investors are looking again to invest in REITs.

Growth turning up; as real estate fundamentals remain firm.

  • General sentiment among REIT managers is turning more positive on the back of stronger macro-economic data points, while declining supply risk (for office, hotels and industrial sub-sectors) are setting the stage for a gradual rebound in organic growth (estimated at 1.5% in FY18; 2.0% in FY19) for the overall S-REIT sector
  • Outlook for the retail sector remains more modest given that retailers are still looking to consolidate operations but the worst is over as overall retail spending has been inching higher in recent months.

REITs to continue to invest overseas to grow portfolio and diversify earnings. 

  • Given supportive valuations and bountiful opportunities, S-REIT managers are ambitious to grow inorganically. We have seen a number of S-REIT managers expanding their mandates to include new geographies (e.g. MINT included data centres overseas, while MAGIC expanded its investment mandate to include Japan), which in our view, improves portfolio and earnings diversity.

Interest cost is mitigated. 

  • We believe that investors should be less worried about the impact of rising rates on distributions given that on average
    1. S-REITs have hedged 80% of their interest costs into fixed rates, and
    2. diversified funding sources which results in having no concentration of debt expiry in a single year. 
  • These result in fairly modest < 3% reduction in distributions if interest costs rise by 1%.

Ascendas REIT 

Industrial sector is bottoming out. 

  • 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 number of enquiries have been improving 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 rental rates remain firm.
  • Among the industrial sub-segments, we remain most optimistic on the business park sub-segment where a combination of increasing tenant relocation amid limited supply situation is expected to drive rentals higher in 2018- 2019. The warehouse sub-segment, which has been the main drag to rental reversions due to any oversupply situation is also past its worst as new competitive supply has been absorbed.
  • Rental reversions are projected to remain stable at 3-5% in FY18-19.

Acquisitions to surprise. 

  • The Manager is looking to complement DPU growth with acquisitions and is keen to execute on opportunities in Singapore and Australia.
  • Supporting the Manager’s inorganic growth ambitions is a conservatively geared balance sheet of 35.2%, which empowers the REIT with financial flexibility to debt-fund these opportunities. The REIT’s sponsor, Ascendas-Singbridge has a pipeline of properties, worth close to S$1bn which could be injected into the REIT when ready. 
  • (Read also: Ascendas-Singbridge Building Strengths & Deepening its Presence)

Stable financial metrics. 

  • Financial metrics remain strong with the Manager taking on a conservative approach towards keeping gearing low and actively manage the REIT’s debt maturity profile. As of 3QFY18, A-REIT’s average debt maturity profile stood at 2.8 years with minimal refinancing risk every year. Average interest cost remained stable at 2.9% with c.70% of interest cost hedged into fixed rates, thereby minimising the impact of a rise in rates.

Ascendas Hospitality Trust 

Major markets turning around. 

  • Ascendas Hospitality Trust (ASCHT) owns a diversified portfolio of 11 hotels located in key gateway cities in the Asia Pacific region. The portfolio is valued at close to S$1.6bn. 
  • The portfolio’s diversity in terms of city and hotel segments allows the portfolio of hotels to target a wide range of travellers (from corporates to leisure) which allows the REIT to continue enjoying steady returns across the year.

Australia hotels a key driver to earnings. 

  • ASCHT’s Australian portfolio contributed c.52% of 9M18 NPI, a key driver to forward distribution. With continued growth in tourist arrivals and modest new hotel supply in the business districts of Sydney and Melbourne in the near term, we expect ASCHT’s properties in these two locations to drive the REIT’s performance going forward. 
  • Moving into 2019, the Australian portfolio should also receive a boost as ASCHT has inked an agreement to acquire the serviced apartment component at Aurora Melbourne Central for A$120m, on an NPI yield of 7.6%, which we have yet to price into our estimates.

Redeployment of sales proceeds. 

  • With its gearing expected to drop to c.28% post the sale of its Beijing hotels, we believe that ASCHT is in a strong position to pursue DPU-accretive acquisitions. While the manager has alluded to paying out part of the gains from the sale to unitholders, we believe that the bulk should go into acquisitions to grow DPUs. 
  • With a global investment mandate, there are vast opportunities for the Manager to tap, especially from Europe.

Interest cost. 

  • 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 3QFY18, ASCHT's average debt maturity profile stood at 2.8 years with minimal refinancing risk every year.
  • Average interest cost remained stable at 2.7% with c.78% of interest cost hedged into fixed rates, thereby minimising the impact of a rise in rates.

Continue reading >> Singapore REITs - The Bottom Is Near (Part 2 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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