Singapore REITs - OCBC Investment 2018-07-31: Increase Defensiveness Among Defensives

SGinvestors.io

FRASERS CENTREPOINT TRUST SGX:J69U FRASERS LOGISTICS & IND TRUST SGX:BUOU KEPPEL DC REIT SGX:AJBU MAPLETREE NORTH ASIA COMM TR SGX:RW0U FAR EAST HOSPITALITY TRUST SGX:Q5T

Singapore REITs - Increase Defensiveness Among Defensives

• Weaker outlook for hospitality REITs.
• Seek more defensive shelter.
• Switch to FCT, FLT, KDCREIT and MAGIC.

Tempering our expectations for hospitality REITs

• We have pushed back our expectations for a pick-up in Singapore hotels’ RevPAR from this year to early 2019, following the latest set of results. 2Q18 hotel RevPAR growth came in at -0.5% y-o-y for OUE Hospitality Trust (OUEHT) and -0.9% y-o-y for CDL Hospitality Trusts (CDLHT). Management feedback regarding the 2Q performance highlighted
  1. ongoing competition from 4Q17’s new room supply,
  2. the Trump-Kim summit which disrupted corporate plans and affected the visa issuance of corporate travellers/tour groups and
  3. two public holidays that fell mid-week.
• Beyond the one-off occurrences mentioned above, we are wary that the ongoing ramp-up at the new hotels will continue to interfere with attempts to increase Average Daily Rates (ADRs) for longer than expected. Compared to its peers, Far East Hospitality Trust (FEHT) posted a surprisingly strong 6.9% RevPAR increase on the back of better occupancy as well as higher ADRs.
• Within the hospitality sub-sector, we favour FEHT the most given that it stands to benefit from the low base effect of poor operational results in FY17.

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Hospitality: Looking at relatively muted DPU growth for 2H18?

• There are other REIT-specific reasons to expect more muted DPU growth from hospitality REITs under our coverage. For instance, OUEHT faces a high 2H17 RevPAR base to surpass and a lack of income support for its Crowne Plaza Changi Airport. We also expect CDLHT’s New Zealand and Maldives assets to be a drag in 2H18.
• On the other hand, Ascott Residence Trust’s portfolio’s wide geographic diversification makes it less volatile operation-wise, both in terms of upside and downside. Given this relatively muted DPU growth outlook for 2H18 as well as the rising interest rate environment, we find this sub-sector less attractive than before in terms of valuations.

Switch to more defensive names

• As such, we have downgraded a number of the hospitality REITs under our coverage during this earnings season. We recommend investors to seek more defensive shelter in their investment approach towards the REITs sector. We believe REITs with strong balance sheets, long WALEs and/or exposure to more resilient sectors such as suburban retail would fit in our selection criteria. 
• Investors holding hospitality REITs can consider switching into Frasers Centrepoint Trust (FCT) [Rating: BUY; Fair Value: S$2.49]; Frasers Logistics & Industrial Trust (FLT) [Rating: BUY; Fair Value: S$1.21]; Keppel DC REIT (KDCREIT) [Rating: BUY; Fair Value: S$1.54] and Mapletree North Asia Commercial Trust (MAGIC) [Rating: BUY; Fair Value: S$1.42].
  • FRASERS CENTREPOINT TRUST (SGX:J69U)  Frasers Centrepoint Trust (SGX:J69U) Share Price  Frasers Centrepoint Trust (SGX:J69U) Target Price  Frasers Centrepoint Trust (SGX:J69U) Analyst Reports  Frasers Centrepoint Trust (SGX:J69U) Corporate Actions  Frasers Centrepoint Trust (SGX:J69U) Announcements  Frasers Centrepoint Trust (SGX:J69U)Latest News  Frasers Centrepoint Trust (SGX:J69U) Blog Articles’s DPU growth has been buffered by its larger malls, while aggregate leverage is healthy at 29.3%.
  • For FRASERS LOGISTICS & IND TRUST (SGX:BUOU)  Frasers Logistics Trust (SGX:BUOU) Share Price  Frasers Logistics Trust (SGX:BUOU) Target Price  Frasers Logistics Trust (SGX:BUOU) Analyst Reports  Frasers Logistics Trust (SGX:BUOU) Corporate Actions  Frasers Logistics Trust (SGX:BUOU) Announcements  Frasers Logistics Trust (SGX:BUOU)Latest News  Frasers Logistics Trust (SGX:BUOU) Blog Articles, while risks from further depreciation of the AUD against SGD may affect its FY19 DPU, we had already lowered our AUDSGD assumptions previously. WALE is healthy at 6.75 years (as at 31 Mar 2018); the addition of a portfolio of 21 assets from key logistics markets Germany and the Netherlands provides diversification to FLT’s income streams.
  • KEPPEL DC REIT (SGX:AJBU)  Keppel DC REIT (SGX:AJBU) Share Price  Keppel DC REIT (SGX:AJBU) Target Price  Keppel DC REIT (SGX:AJBU) Analyst Reports  Keppel DC REIT (SGX:AJBU) Corporate Actions  Keppel DC REIT (SGX:AJBU) Announcements  Keppel DC REIT (SGX:AJBU)Latest News  Keppel DC REIT (SGX:AJBU) Blog Articles has one of the longest WALE in the S-REITs universe, at 8.8 years. Its aggregate leverage of 31.7% also leaves ample debt headroom to fund inorganic growth ahead.
  • MAPLETREE NORTH ASIA COMM TR (SGX:RW0U)  Mapletree North Asia Commercial Trust (SGX:RW0U) Share Price  Mapletree North Asia Commercial Trust (SGX:RW0U) Target Price  Mapletree North Asia Commercial Trust (SGX:RW0U) Analyst Reports  Mapletree North Asia Commercial Trust (SGX:RW0U) Corporate Actions  Mapletree North Asia Commercial Trust (SGX:RW0U) Announcements  Mapletree North Asia Commercial Trust (SGX:RW0U)Latest News  Mapletree North Asia Commercial Trust (SGX:RW0U) Blog Articles derives 64% of its FY19F NPI from Festival Walk, which has proven to be resilient over the years, even during the last Global Financial Crisis.
• Overall, we maintain NEUTRAL on the S-REITs sector.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2018-07-31

SGX Stock Analyst Report BUY Maintain BUY 2.490 Same 2.490

BUY Maintain BUY 1.210 Same 1.210

BUY Maintain BUY 1.540 Same 1.540

BUY Maintain BUY 1.420 Same 1.420

HOLD Maintain HOLD 0.675 Same 0.675