Singapore Industrial REITs - Phillip Securities 2018-05-21: Stabilising Average Occupancy, Average Rent Decline Slowing

Singapore Industrial REITs - Phillip Securities 2018-05-21: Stabilising Average Occupancy, Average Rent Decline Slowing Singapore REITs Outlook Industrial SREITs MAPLETREE INDUSTRIAL TRUST SGX: ME8U KEPPEL DC REIT SGX: AJBU ASCENDAS REAL ESTATE INV TRUST SGX: A17U CACHE LOGISTICS TRUST SGX: K2LU

Singapore Industrial REITs - Stabilising Average Occupancy, Average Rent Decline Slowing

  • Maintain Equal Weight view on Industrial REITs sub-sector.
  • Marginal q-o-q improvement in sector occupancy, while Rental Index is lower q-o-q.
  • Rental Index across the board yet to bottom, but Business Park rental made new high.
  • Tapering of new supply in 2018 is a tailwind for the sector, but absorption of vacant space is still slow.
  • History being made with the first industrial REIT acquisition of Viva Industrial Trust by ESR-REIT.

What is the news?

Key takeaways from the quarter

+ Some positive sentiment during the quarter

  • One manager commented that signing rents during the quarter were higher compared to 6-9 months ago on a same-asset basis. Examples of trade sectors where demand is coming from are Precision Engineering, Electrical and Machinery Products, Transport and Storage and Biomedical.

+ Slight tightening of capitalisation rates

A mixed bag of manager expectations for 2018

  • Optimism is for Business Park and Hi-Tech/Hi-Specs properties, while caution for standard industrial space and warehouse space.

Rental reversions generally negative; managers expect rents to bottom in 2018

  • Industrial S-REITs generally reported negative renewal rates. Even bellwethers A-REIT and MINT reported -6.8% and -2.2% reversions respectively, on their Singapore portfolios for the quarter. 
  • Our view remains unchanged for negative reversions to persist in 2018, and we believe rents to bottom only by the end of 2018.

Major events

Acquisition of Viva Industrial Trust by ESR-REIT

  • After extending the exclusivity period for the proposed acquisition of Viva Industrial Trust (VIT) by ESR-REIT a few times, the acquisition was finally announced on May 18. ESR-REIT will acquire VIT stapled securities for S$0.96/stapled security (26% premium to NAV). The transaction is to be satisfied by 10% cash and 90% through new ESR-REIT units, priced at $0.54/unit.
  • For illustration, for every 100 VIT Stapled Security held, VIT Stapled Security holders can expect to receive $9.60 in cash and 160 new ESR-REIT units.
  • The new enlarged REIT will potentially become the fourth largest industrial S-REIT.

Large platform acquisition for FLT

  • Frasers Logistics & Industrial Trust (FLT) is acquiring a platform of 17 properties in Germany and 4 properties in the Netherlands from its Sponsor for €597mn (~A$949mn), growing total portfolio value to A$2.9bn. An EGM has been convened, with Unitholders giving approval for the acquisition, and for the manager to issue new units. 
  • Financing of the acquisition will be through a combination of Private Placement, Preferential Offering and debt.

And MLT has a large platform acquisition as well

  • Mapletree Logistics Trust (MLT) is acquiring a 50% interest in 11 warehouses located in China from its Sponsor for RMB1,022mn (~S$213mn), growing total portfolio value to S$6.8bn. MLT's Sponsor will be the sole investor of the other 50% interest. An EGM will be convened on May 24 to seek Unitholders' approval for the acquisition. 
  • Financing will be through Equity Fund Raising and debt.

Manager of SSREIT managed to get the general mandate back

  • At the recent shareholders' annual general meeting (AGM), 55.72% of the votes cast were "For" the resolution authorising the manager to issue Units and to make or grant convertible instruments. With the general mandate, the manager of Sabana Shari'ah Industrial REIT (SSREIT) can collect fees in units instead of cash. 
  • The retained cash can then be used to fund the manager's rejuvenation strategy of making AEIs on core assets.

Tellus Marine defaulted at SBREIT's property

  • Tellus Marine had unpaid rent at Soilbuild REIT's (SBREIT's) property at 39 Senoko Way. As at the end of 2017, the tenant had defaulted on about five months and the manager made the decision to terminate the lease. 
  • The manager has been able to backfill the property to 34% and with the 18 months security deposit that it holds, expects to be able to maintain the property's NPI "as if the master lease is still in place for the substantial part of FY2018".

Investment Actions

  • We maintain our "Equal Weight" view on the Industrial sub-sector.
  • The tailwind for the sector is the tapering of supply of Industrial space in 2018. We believe rents to find a bottom by the end of the year; and negative reversions persisting, 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

Rating change: Keppel DC REIT (Neutral to Accumulate).

  • We had maintained Keppel DC REIT at Neutral (17 April) after its 1Q FY18 results and subsequently upgraded it to Accumulate (8 May) following the announcement to acquire a 99% interest in Kingsland Data Centre Pte Ltd.

Keppel DC REIT – A whisker away from S$2bn AUM target

  • Acquiring 99% interest in Kingsland Data Centre Pte Ltd and the data centre to be renamed KDC SGP 5; this will lift AUM from S$1.66bn to S$1.97bn.
  • Private Placement of 224mn New Units to raise gross proceeds of S$303.1mn to partially fund the acquisition that is expected to be completed in 2Q 2018.
  • Inorganic growth that will contribute in 2018 are: KDC DUB 2 (acquired in September 2017), maincubes Data Centre (acquired in March 2018) and KDC SGP 5.

Ascendas REIT – Positioned to benefit from upswing

  • Portfolio occupancy remains high at 91.5% with healthy WALE of 4.2 years; slight tightening of capitalisation rates at the end of FY18
  • 55% of A-REIT's net property income is derived from Business Park and Hi-Specs properties in Singapore
  • Contribution from recent acquisitions to mitigate the renewal risk of 14% of portfolio GRI that is up for renewal in FY19

Cache Logistics Trust – Initial pains of portfolio re-balancing strategy

  • CWT Commodity Hub converted to multi-tenancy on April 12 at 86% occupancy, which is lower than the JTC average of 88.9% for warehouses.
  • Current gearing of 38.5% expected to be further reduced to 32.5%, by using the divestment proceeds from 40 Alps Ave to repay debt.
  • Renewal risk for the remainder of 2018 is 6.7% of GRI against a backdrop of tapering supply of new space.

Mapletree Industrial Trust – Going Hi-Tech

  • Lower occupancy as recently completed speculative redevelopment 30A Kallang Place is included in the portfolio; slight tightening of capitalisation rates at the end of FY17/18.
  • 30A Kallang Place (40% pre-committed) and build to suit data centre both coming on stream in 2018; and JV platform of 14 US data centres to contribute positively to the Hi-Tech Buildings segment this year.
  • Manager expects softer leasing from Flatted Factories, while Business Park Buildings to remain fairly strong.

Richard Leow CFA Phillip Securities | https://www.stocksbnb.com/ 2018-05-21
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.090 Same 2.090
ACCUMULATE Maintain ACCUMULATE 1.510 Same 1.510
ACCUMULATE Maintain ACCUMULATE 2.910 Same 2.910
ACCUMULATE Maintain ACCUMULATE 0.910 Same 0.910