Singapore REITs - Phillip Securities 2018-11-20: Monthly Tracker (November 2018)

CAPITALAND COMMERCIAL TRUST (SGX:C61U) KEPPEL DC REIT (SGX:AJBU)

Singapore REITs - Monthly Tracker (November 2018)

FTSE S-REIT total return declined 4.9% YTD. Weakness across all sub-sectors – save for hospitality over the past month – with Frasers Hospitality Trust being the top performer (+5.6% MTD) and Keppel-KBS US REIT being the worst performer (-17.0% MTD).
Sector yield spread of 273bps over the benchmark 10-year SGS (10YSGS) yield remains close to the -1 standard deviation (SD) level as at end-October.
3m SOR continued to rise YTD, ending at 1.73% in October.
Remain NEUTRAL on S-REITs sector. Sub-sector preferences: Office and Hospitality.

The S-REIT yield spread remains close to the -1 standard deviation (SD) level as at end-October. The 10YRSGS yield currently stands at 2.51%.
Rising interest rates will be a headwind for S-REITs from a yield and interest expense perspective, but it does not necessarily lead to a bearish state as rental growth can be a mitigating tailwind.

3-month SOR Hitting 1.73% at end-October, the 3-month SOR was the highest since Jan 2005.

Dismal results reported by the Singapore retail REITs, on the back of negative or flat rental reversions recorded in 3QCY18. Tenant sales and footfall still weak y-o-y, which could continue to place pressure on occupancy cost and thus, reversions.
CapitaLand Mall Trust (CMT) had completed the acquisition of the remaining 70% interest in Westgate on Nov 1, which the REIT had held a successful S$278mn private placement exercise for. Assuming CMT’s current funding cost of 3.2%, this funding structure of c.65% debt would be accretive to FY18e and FY19e DPU.
Retail sales ticked up 1.8% y-o-y in September, with Fashion (+3.0% y-o-y) and Watches and Jewellery (+7.4% y-o-y) being some of the top contributors. The F&B index was up 1.3% y-o-y in September.

Uptick in both central and office rental indices for 3QCY18, helped by y-o-y improvement in occupancy for both Central and Fringe office space. Above 98% occupancy for the office REITs, well above the average central office occupancy of 88.2%.
With average Grade A rental rates improving over the past five quarters, positive or higher reversions are expected to come about once they surpass expiring rents – which were typically signed c.3 years ago.
Frasers Tower had a reported 90% occupancy rate, and the only Grade A supply for the year will be from 16 Robinson.

Rental Index appears to be stabilising, as it declined -0.1% q-o-q to 90.9 and the decline each quarter this year has been getting smaller. 3QCY18 occupancy ticked up slightly y-o-y to 89.1% and 89.4% for factory space and warehouse space, respectively.
Rental reversions during the quarter were generally negative.
Demand-side looks fragile, as manufacturing and export data are moderating; and the threat of escalating trade tariffs is adding pressure to an already uncertain outlook.

Average RevPAR rose 4.48% y-o-y, to S$197, in September, both on higher occupancy and higher average room rates (ARR).
While higher occupancy rates were clocked in for the Singapore portfolio across the Hospitality REITs, RevPAR was down y-o-y for a few REITs owing to new market entrants in the area which placed pressure on the ARR.

While the S-REIT yield spread is currently near the -1SD level since the global financial crisis, strong rental growth should offset any adverse effects from rising interest rates. As such we have identified pockets of opportunities within each sub-sector that would exhibit these characteristics of healthy reversion rates and strong leasing activity.
We maintain NEUTRAL on the S-REITs sector on declining tenant sales in the Retail sub-sector and sluggish net absorption of Industrial space. A marked improvement in tenant sales would allow the retail S-REITs to improve occupancy levels at sustainable rental levels. However, tighter e-commerce competition and the oncoming retail supply glut would continue to weigh on retail rentals in the medium term.
While Industrial rents have been stabilising, occupancy still has some catching up to do in order to provide a meaningful catalyst for a sub-sector upgrade.

We like the Commercial and Hospitality sub-sectors due to tapering supply after the surge in supply in the prior two to three years.
We are cautious on the Retail sub-sector as retail sales and shopper footfall both leave much to be desired.

REITs that can better weather through the rising interest rate environment would be those with:
1. Low gearing;
2. High-interest coverage;
3. Long weighted average debt to maturity; and
4. A high proportion of debt on fixed interest rates
…such as CapitaLand Commercial Trust (ACCUMULATE, TP:S$1.90), Keppel DC REIT (ACCUMULATE, TP:S$1.45), Frasers Commercial Trust*, and Keppel-KBS US REIT*.
* Currently not under PSR coverage

Tara WONG Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-20

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.900 SAME 1.900

ACCUMULATE MAINTAIN ACCUMULATE 1.450 SAME 1.450