SREIT Analysis
SREIT Return Yield
ASCENDAS REAL ESTATE INV TRUST
SGX:A17U
CDL HOSPITALITY TRUSTS
SGX:J85
SUNTEC REAL ESTATE INV TRUST
SGX:T82U
FRASERS CENTREPOINT TRUST
SGX:J69U
Singapore REITs - Pedal To The Metal
- Investors have misperceived S-REITs as a bond and referenced valuations metrics to an improper period.
- S-REIT’s ability to pursue DPU-accretive acquisitions to offset higher interest rates under appreciated.
- Squeeze on tenants starting to occur with Singapore market progressively moving to a landlords market.
- Top picks: AREIT, CCT, CDREIT, FCT, MLT and Suntec REIT.
Misreading S-REIT drivers.
- The cautious stance by some investors and sell-side analysts is shaped by their view that
- interest rates are rising, and
- valuations are “expensive” vs the sector average over the last five years.
- But we would like to highlight that REITs are not straight out bonds and the impact of rising interest rates is mitigated by an expected upturn in rents.
- Plus, while acknowledging that current yields and yield spreads are near their 5-year lows, the last five years have largely seen excess supply, falling rents and sluggish business environments. In contrast, we are heading towards a period of easing supply pressure, a more buoyant economy and rising rents.
- Thus, we believe investors should assess S-REITs’ against their longer historical track record, and against the backdrop of a multi-year upturn in the Singapore property market. This is our base scenario over the next 3-4 years. Under such an environment which also coincides with rising interest rates, yield spreads should tighten to 3% from 3.4% currently.
Value-add using acquisitions; Positive impact from inorganic strategy largely ignored
- Beyond our view that some investors are incorrectly viewing S-REITs as a straight forward bond-type investment and assessing S-REITs against valuation metrics with an inappropriate time period, we believe the market has largely ignored the benefits from the acquisitions made by various S-REITs in recent times.
- Since the start of the year, S-REITs announced 20 acquisitions worth S$5.0bn. These include Ascendas India Trust (a-iTrust), Far East Hospitality Trust (FEHT), Keppel DC REIT (KDCREIT), Mapletree Logistics Trust (MLT) and Manulife US REIT (MUST), which deepened their presence in their existing core markets. In addition, we have had S-REITs head to new markets for the first time with, Frasers Commercial Trust (FCOT), Mapletree North Asia Commercial Trust (MAGIC), Frasers Logistics & Industrial Trust (FLT) and CapitaLand Commercial Trust (CCT) acquiring properties in the UK, Japan, Netherlands, and Germany.
- On top of providing an immediate DPU accretion and boost to medium-term earnings profile as well as mitigating the impact of increasing borrowing costs, the acquisitions largely also improve the quality of the earnings stream through enhancing the resilience and diversification of SREITs. Furthermore, the addition of freehold properties via overseas acquisitions also protects against the risk of NAV dilution in the medium term, as the properties in Singapore approach the end of their leasehold life.
- Further details of notable transactions over the last few months are highlighted in the company guides.
- Mapletree North Asia Commercial Trust: Climbing To The Next Summit
- Manulife US Real Estate Inv: US Upswing Beckons
- Ascendas India Trust: The Need For Speed
- Frasers Logistics & Industrial Trust: Going Global
- Keppel DC REIT: Hitting Its Targets
- Mapletree Logistics Trust: Doubling Down On China
- Ascendas Hospitality Trust (ASCHT): Upside From Asset Recycling
- CapitaLand Commercial Trust: Guten Tag Frankfurt
Pick up selected office and hotel names.
- Given expectations that the office and hotel sectors should see the strongest pick-up in rents/room rates over the coming year on easing supply pressures, we believe that now is an opportune time to pick up selected names in these two sectors.
- Our top picks are CCT (Target Price S$2.10), Suntec (Target Price S$2.30) and CDREIT (Target Price S$2.00).
- AREIT (Target Price S$3.00) and MLT (Target Price, S$1.48) are also stocks we like given its exposure to the potential turnaround of the industrial sector. Finally, FCT’s (Target Price S$2.45) strong near-term DPU growth, warrants a relook in our view.
SREIT Top Picks
- For more details on our top picks, see the table below.
Large-cap top picks
| REIT | Current Price (S$) | 12-mth TP (S$) | Expected 12-mth Total Return | FY18/19F yield | FY18/19F P/Bk | Rationale |
|---|---|---|---|---|---|---|
| AREIT | 2.60 | 3.00 | 21% | 6.2% | 1.23 | Steady consistent performer with scale. Overhang from lack of CEO now removed. |
| CCT | 1.64 | 2.12 | 35% | 5.3% | 0.93 | Leveraged to the multi-year recovery in the Singapore office market and trades at 1.0x P/Bk, but during an upcycle CCT can trade up to 1.2x P/Bk. |
| MLT | 1.23 | 1.48 | 26% | 6.3% | 1.09 | Driven by acquisitions and a portfolio that is skewed more towards e-commerce. |
| Suntec | 1.69 | 2.30 | 42% | 5.9% | 0.80 | Play on the turnaround of Suntec Mall and recovery in the Singapore office market, with potential upside from a takeover. |
Mid-cap top picks
| REIT | Current Price (S$) | 12-mth TP (S$) | Expected 12-mth Total Return | FY18/19F yield | FY18/19F P/Bk | Rationale |
|---|---|---|---|---|---|---|
| CDREIT | 1.61 | 2.00 | 31% | 6.3% | 1.05 | Leveraged to the multi-year recovery in the Singapore hospitality market. |
| FCT | 2.19 | 2.45 | 18% | 5.7% | 1.08 | Strong DPU growth on the back of the completion of AEI at NorthPoint. |
Mervin SONG CFA
DBS Vickers
|
Derek TAN
DBS Vickers
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https://www.dbsvickers.com/
2018-06-26
SGX Stock
Analyst Report
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