Industrial REITs Sector Outlook - Maybank Kim Eng 2019-04-17: Bottoming Out; Overseas Deals To Lift DPU

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AIMS AMP CAP INDUSTRIAL REIT (SGX:O5RU) CACHE LOGISTICS TRUST (SGX:K2LU) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Industrial REITs Sector Outlook - Bottoming Out; Overseas Deals To Lift DPU

• Analyst sector view: POSITIVE

Easing supply, demand tilted to business parks and high-specs

• Industrial rents have stabilised and should bottom out, in our view, given low supply across all asset types. Demand continues to be skewed towards high-spec properties that are close to infrastructure and transport nodes. According to CBRE, semiconductor, electronics and third-party logistics players contributed to the bulk of leasing demand in 2018, led mostly by renewals and in some instances by expansion.
• We expect rents for newer business parks at city fringes and high-spec properties to firm up further with technology firms and co-working operators expanding selectively outside the CBD.
• While demand for older business parks could remain weak, we estimate that city-fringe business-park rents could rise 3% this year, against a 15% jump in office rents in 2018.

DPU levers from redevelopment projects, overseas deals

• The slowing demand for older properties should continue to motivate industrial landlords to embark on AEI or redevelopment. This is especially so since average land tenures for their properties are longer than for new industrial government land sales, where supply has continued to be trimmed.
• In addition, we expect overseas acquisitions completed in the past 24 months to help lift DPUs in 2019. We expect acquisition growth momentum to gain traction, with deals focused on developed markets.
• Our preferred large-cap industrial REITs remain ASCENDAS REIT (SGX:A17U) and MAPLETREE INDUSTRIAL TRUST (SGX:ME8U), given their clear developed-market growth mandates and debt headroom.

What could go wrong? The key risks to our view

• The key risks to our forecasts are:
  1. a prolonged slowdown in economic activity which could reduce demand for industrial space, resulting in lower occupancy and rental rates;
  2. termination of long-term leases contributing to a weaker portfolio tenant retention rate; and
  3. sharper-than-expected rise in interest rates which could increase the cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Valuations – Higher yields, in-line growth profile

• Large-mid cap industrial REITs are expected to deliver 3.0-4.5% DPU CAGR against the S-REIT’s 2.7-5.2%. The sector offers about 6.8% FY19 dividend yield against the sector’s 4.6% yield.
• Valuations have not factored in potential DPU-accretive acquisitions, which are more evident relative to other sectors, and which will favour REITs with wider debt headroom.

Mapletree Industrial Trust (MINT) best mid-cap exposure

• MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) has visible growth drivers from its:
  1. AEI at 30A Kallang Place;
  2. recently completed Sunview 1 BTS data centre; and
  3. recent acquisition of 18 Tai Seng from its sponsor.
• Its US data-centres should also see rising contributions in FY20.
• Low 34.7% gearing and clear acquisition-growth potential could provide upside to ear 4.5% DPU CAGR forecast.

Industrial REITs valuation summary

See also

• Singapore Market Monitor ~ Foggy With A Hint Of Sunsine
• Singapore Market Monitor ~ Top Stock Ideas

Singapore Research Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.550 SAME 1.550

BUY MAINTAIN BUY 0.880 SAME 0.880

BUY MAINTAIN BUY 2.250 SAME 2.250

HOLD MAINTAIN HOLD 1.400 SAME 1.400

BUY MAINTAIN BUY 3.100 SAME 3.100