Singapore REITs - Maybank Kim Eng 2019-04-03: Patience Rewarded

Singapore REITs - Maybank Kim Eng Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) FRASERS CENTREPOINT TRUST (SGX:J69U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) ASCOTT RESIDENCE TRUST (SGX:A68U) AIMS AMP CAP INDUSTRIAL REIT (SGX:O5RU) CACHE LOGISTICS TRUST (SGX:K2LU) CAPITALAND MALL TRUST (SGX:C38U) FRASERS HOSPITALITY TRUST (SGX:ACV) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) MAPLETREE LOGISTICS TRUST (SGX:M44U) SPH REIT (SGX:SK6U) STARHILL GLOBAL REIT (SGX:P40U)

Singapore REITs - Patience Rewarded


Rates stay lower for longer 

  • S-REITs are up 11% YTD against the market’s 7%, and we see further outperformance as the Fed stays patient on its current rate hike cycle. See S-REITs share price performance
  • We revisit our assumptions on lower interest rates, adjusting FY19-21 DPUs by between -2% and +4% and raising TPs by 2-9%. While investors could eye near-term profit-taking, fundamentals remain sound.
  • 2019 DPU recovery will be demand-led, especially for hospitality. Capital recycling is gaining traction, with acquisition momentum favouring REITs with higher debt headroom.
  • Our top picks remain ASCENDAS REIT (SGX:A17U), CDL HOSPITALITY TRUSTS (SGX:J85) and FRASERS CENTREPOINT TRUST (SGX:J69U) – all BUYs. They trade at 5.7-6.0% FY19E div yield versus the sector’s 4.6%, and are set to deliver 4.2-7.0% DPU CAGR, against the sector’s 2.7-5.2%. 



Adjusting DPUs and TPs 

  • Following the Fed’s dovish statement in Mar 2019, MKE economists now expect no change to rates in 2019-2020 and have revised (down) ASEAN benchmark interest rate forecasts (MKE Economics: Rate hike no more, QT unwind).
  • Our positive view on S-REITs has worked out well, with delayed rate hikes and low interest rates suggesting that they will likely stay in favour as yields remain low. While their 250bp spread to 10-year Singapore government bonds trails most of their peers, the sector still commands one of the highest dividend yields.
  • We were assuming a 3.0% risk-free rate in our DDM valuations but have trimmed this by 20bps to 2.8%. We revised DPUs by -2.2% to +4.1% as we adjust interest-rate assumptions but keep operating estimates mostly unchanged (S-REITs will report results in the coming weeks). Our target prices across the sector have been raised by 2-9%. 




Stay with hospitality & industrial for yields + growth 

  • Our preference remains Hospitality REITs as sector RevPARs recover from their longest ever downcycle, at 5-8% growth for 2019-20E, with hotels commanding stronger pricing power against contracting supply, as new rooms slow to a 1.3% CAGR in 2018-21E from 5.5% in 2014-18.
  • DPUs for Industrial REITs will be supported by overseas acquisitions completed last year, to mitigate an uneven recovery in Singapore; newer business parks and high-spec industrial properties remain bright spots, against sharp office rent increases.
  • We stay selective on Retail REITs and prefer Frasers Centrepoint Trust for its suburban mall footprint, and see DPU growth levers for Mapletree Commercial Trust (SGX:N2IU)


Pair trade has done well, AREIT set to outperform 



Top S-REIT BUYs   


ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

  • Ascendas REIT is the largest and most liquid S-REIT. We expect rising overseas exposure to offset lower Singapore contributions in the near term. We continue to favour its scale and see it as the best proxy for a recovering industrial sector, given its concentrated business-park and high-spec portfolio, which contributes 60% to its AUM.
  • Following its UK entry and a stronger sponsor pipeline after the CAPITALAND LIMITED (SGX:C31)-Ascendas Singbridge merger, we see further diversification which could provide upside to our FY19-21E 3.0% DPU CAGR. 
  • See report: Ascendas REIT - Grab-bing More Growth.

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

  • Mapletree Industrial Trust 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 our 3-year 5.0% DPU CAGR forecast. 
  • See report: Mapletree Industrial Trust - Delivering On High-Tech.

CDL HOSPITALITY TRUSTS (SGX:J85)

  • CDL Hospitality Trusts is our top hospitality sector pick, as its scale and liquidity render it a good proxy for a sustained recovery in Singapore’s hospitality sector. Meanwhile, its overseas expansion has gained traction, with its continued push into Europe supported by positive carry from low funding costs. Low gearing and an estimated SGD600m.
  • See report: CDL Hospitality Trusts - Recovery Underway.

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

  • Far East Hospitality Trust provides the only pure exposure to our expected rebound in the hospitality segment. Rising contributions from its recently-acquired Oasia Downtown, an expected 5% y-o-y annual recovery in hotel RevPARs and management fees from three Sentosa properties opening this year are expected to anchor its strongest 6% DPU CAGR in FY18-20E.
  • We see stronger DPU upside potential from its higher Singapore RevPAR sensitivity and visible sponsor’s ROFR pipeline. 
  • See report: Far East Hospitality Trust - Recovery Gaining Traction.

FRASERS CENTREPOINT TRUST (SGX:J69U)

  • Frasers Centrepoint Trust is our only BUY among retail REITs for its strengthening suburban-mall footprint, visible growth drivers and potential acquisition catalysts.
  • Gearing of 28.8% and SGD800m of debt headroom should support acquisitions. Sponsor pipeline assets – Northpoint City’s South Wing and 33% interest in Waterway Point - could strengthen its suburban footprint. 
  • See report: Frasers Centrepoint Trust - From Strength To Strength.


Maintain Sector Preferences 


Hospitality recovers from longest-ever downcycle 

  • We forecast 5-8% RevPAR growth for 2019-20E, preferring hotels to serviced residences. Hotels should have stronger pricing power against contracting supply. Occupancy as at end-2018 was at a 5-year high. momentum is expected to continue into 2019.
  • Importantly, we believe the sector’s recovery will be strengthened by easing supply, as new hotel rooms is expected to slow to a 1.3% CAGR in 2018-21E from 5.5% in 2014-2018.
  • We also see DPU levers from overseas investments, which are mostly de-risked through master leases and minimum rent guarantees. We believe deal momentum in Europe could pick up, given positive carry from low EUR funding costs. 

Rental growth on easing industrial supply, overseas assets lifting DPUs 

  • Industrial rents have stabilised and should bottom out, given low supply pipelines for all sub-segments. Demand remains skewed towards high-spec properties that are close to infrastructure and transport nodes.
  • 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.
  • Overseas acquisitions completed in the past 24 months should help lift DPUs in 2019.
  • Our preferred large-cap industrial REITs remain Ascendas REIT and Mapletree Industrial Trust, given their clear developed-market growth mandates and debt headroom. 

Destination or suburban malls better positioned in retail 

  • We expect REIT-owned malls to outperform the broader retail market, with leasing demand supported by F&B offerings and activity-based tenants. Tourists’ shopping receipts, though, have been declining against growth in visitor arrivals.
  • We expect retail supply to peak this year with April’s opening of Jewel at Changi Airport, which adds to competition and rents in eastern Singapore. We also think larger destination malls such as VivoCity and Causeway Point will perform better in shopper traffic and tenant sales growth. 

Latest Master Plan could support longer-term DPUs, benefit MCT 

  • S-REITs’ longer-term DPUs could be supported by the Urban Redevelopment Authority Draft Master Plan 2019, released on 27 Mar 2019, which maps out the government's plans for land use over the next 10-15 years.
  • There are plans to allow more homes to be built in the CBD and Marina Bay area to boost live-in populations in areas dominated by offices currently, by offering developers a higher gross plot ratio of 25-30% to convert older offices into hotels and residential units - with the CBD incentive scheme applied to the Anson Road, Cecil Street, Shenton Way, Robinson Road and Tanjong Pagar precincts. This initiative could further tighten office supply and rents, including fringe business parks, in our view.
  • Mapletree Commercial Trust’s VivoCity occupancy has held up well, with DPU support from its recently-completed AEI; its diversified commercial portfolio could benefit from stronger business-park and office rents. An asset-swap opportunity has materialised as narrowing office cap rates imply a SGD125m revaluation gain for Mapletree Anson. Elsewhere, a potential MBC II acquisition could boost DPUs by 9-10%. Upside potential could stem from these rising DPU growth levers. 





Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-03
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