Singapore REITs - OCBC Investment 2018-09-04: A Defensive Armour Despite Some Chinks

Singapore REITs - OCBC Investment Research 2018-09-04: A Defensive Armour Despite Some Chinks

Singapore REITs MAPLETREE NORTH ASIA COMM TR SGX:RW0U KEPPEL DC REIT SGX:AJBU FRASERS CENTREPOINT TRUST SGX:J69U FRASERS LOGISTICS & IND TRUST SGX:BUOU

Singapore REITs - A Defensive Armour Despite Some Chinks

2QCY18 SREIT's DPU down marginally.
Government bond yields have eased.
Top picks: MAGIC, KDCREIT, FCT and FLT.

Credit metrics largely healthy due to prudent capital management

From a balance sheet perspective, the S-REITs under our coverage have remained prudent on their capital management.
The average gearing ratio stood at 35.4%, as at 30 Jun 2018, versus 35.3% at the end of 1Q18. The proportion of borrowings hedged/fixed increased from 73.9% to 75.1%. This has been supported by the stabilisation in the SGD interest rate swaps (IRS), which declined slightly by 15-30 bps for the 1-year, 2-year and 5-year IRS from their May highs, although still higher than start of the year.

Overseas expansion and capital recycling continues

Following the emerging trend of S-REITs penetrating into new geographical markets, we also saw the subsequent announcement of Ascendas REIT’s (SGX:A17U) proposed acquisition of a portfolio of 12 logistics assets in the UK. There were also continued activities on the capital recycling front, with Ascendas REIT and Mapletree Logistics Trust (SGX:M44U) being particularly active.
For Ascendas REIT, besides the UK acquisition, it further entrenched its footprint in Australia, proposing to acquire two properties each in Brisbane and Melbourne for a total consideration of A$113.7m. The initial NPI yields (pre-transaction costs) for these properties ranged between 6.7%-7.8%. It also divested two Singapore properties in Apr and Aug this year for S$37.6m.
For Mapletree Logistics Trust, it recently proposed in Jul to acquire five ramp-up logistics properties in Singapore for an estimated purchase price of S$778.3m, which translates into an expected initial NPI yield of 6.2%. A month before this, Mapletree Logistics Trust completed the divestment of 7 Tai Seng Drive for S$68m, thus recording a strong net divestment accounting gain of S$34.3m on its P&L statement.
Outside of the industrial sector, Ascendas Hospitality Trust (SGX:Q1P) expanded its portfolio in Japan with the acquisition of three WBF Hotels at c.JPY20m per key and also successfully penetrated the South Korean hospitality market. These were largely funded by its two divestments in China at a very attractive exit yield of 3.3%.

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Sovereign bond yields have eased thus providing some respite for S-REITs sector

We see some near-term respite for the S-REITs sector as the Singapore government 10-year bond yield has eased ~29 bps to 2.40% (as at 3 Sep) from its YTD peak of 2.68% in May. This follows the US government 10-year bond yield’s direction, which currently stands at 2.86%, versus a YTD peak of 3.11% on 17 May.
During the recent Jackson Hole symposium, Federal Reserve Chairman Jerome Powell highlighted that there is no clear sign of inflation overshooting above 2% and there also does not seem to be an elevated risk of overheating. Thus, Powell reiterated the Fed Committee’s consensus view that the gradual process of normalisation remains appropriate.
Another rate hike during the 26 Sep FOMC meeting seems well anticipated by the market given the 95.2% probability reflected by the fed funds futures rate.
For Dec, the probability of a subsequent rate hike stands at 65.1%, an increase from 58.8% at the start of Aug this year.

Providing defensive shelter amid macroeconomic uncertainties

We had been largely cautious on the S-REITs sector since the start of the year, particularly during times when the forward distribution yield spread against the Singapore government 10-year bond yield had compressed to two standard deviations below its 5-year mean. This happened during late Jan and early May this year.
Currently, the forward yield spread still remains relatively tight at 363 bps, or 1.1 standard deviations below the 5-year mean (408 bps). However, we are less negative than before, as we believe the ongoing macroeconomic uncertainties emanating from the US-China trade friction and concerns over economic contagion from Turkey have dampened investors’ sentiment and resulted in a flight to good quality defensive assets.
Given the aforementioned factors, we believe S-REITs, with its prudent capital management and proactive leasing approach, can warrant a strategic position in investors’ portfolio, but in a selective manner.
Looking at the street’s coverage on the REITs universe, we note that the average fair values, based on Bloomberg consensus estimates, comes in at ~9.1% above the closing prices (expected total returns +15.6% including projected distribution yields).
Overall, we are NEUTRAL on S-REITs. From a tactical positioning, we would prefer S-REITs to SG developers at this juncture. Our preferred picks are
For Keppel DC REIT (SGX:AJBU), it was announced via an SGX-ST filing on 30 Aug that Keppel Corp (SGX:BN4) has entered into a sale and purchase agreement with UBS AG (Singapore branch) for the sale of 55.1m units (4.1% of total issued units) in Keppel DC REIT for a consideration of at least S$1.36 per unit. UBS would have to purchase the units if it is not able to procure buyers for the units. Given that the average daily volume traded for Keppel DC REIT was 2.4m over the past year (prior to the announcement), and that the unit sales is expected to be completed on 5 Sep, it was not surprising to see selling pressure on Keppel DC REIT’s share price. However, we believe downside is likely limited at current price level and opine that the fundamentals for Keppel DC REIT remain strong.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-09-04

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Singapore REITs - OCBC Investment 2018-09-04: A Defensive Armour Despite Some Chinks

Singapore REITs - A Defensive Armour Despite Some Chinks

Credit metrics largely healthy due to prudent capital management

Overseas expansion and capital recycling continues

Sovereign bond yields have eased thus providing some respite for S-REITs sector

Providing defensive shelter amid macroeconomic uncertainties

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