ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)
MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)
FAR EAST HOSPITALITY TRUST (SGX:Q5T)
CDL HOSPITALITY TRUSTS (SGX:J85)
FRASERS CENTREPOINT TRUST (SGX:J69U)
Singapore REITs - Stronger Growth Amid Tighter Yields
DPU recovery; reiterate top picks
- S-REITs’ strong 8.9% YTD outperformance – helped by benign interest rates against a deteriorating macro backdrop - continues to drive compressions in yields. Their yield spread of 2.7% to 10-year government bonds is testing 2018 lows, but positive supply-led fundamentals especially for industrial and hospitality should back stronger 2019-20 DPU growth. (see Share Price Performance - S-REITs Sector)
- Meanwhile, potential rate cuts in 2H 2019 imply DPU upside. Investors with more conservative total-return thresholds could do well to revisit offshore REITs, trading at 5-12% DPU yields on 2-6% expected DPU growth.
- We adjust our sector bias towards industrial REITs, ahead of hospitality following recent DPU cuts. Our top picks are now ASCENDAS REIT (SGX:A17U), MAPLETREE INDUSTRIAL TRUST (SGX:ME8U), FRASERS CENTREPOINT TRUST (SGX:J69U), CDL HOSPITALITY TRUSTS (SGX:J85) and FAR EAST HOSPITALITY TRUST (SGX:Q5T), based on their DPU recovery, yields and acquisition-growth upside.
Yield spreads test 2018 lows – but with stronger DPU recovery, upside potential
- S-REITs’ yield spreads to 10-year Singapore government bonds continue to tighten YTD. They are testing the lows of May 2018, especially for the large-cap and more-liquid names. However, we see valuation support for our top BUYs from their stronger DPU profiles, which should improve to 4.3-7.6% in 2018-20E from 1.9-4.2% a year ago.
- Market expectations are increasing that the Fed will abandon its patient policy stance to bolster an economy buffeted by trade tensions and other headwinds. Markets see impending cuts in interest rates, possibly by bps by year-end.
- As we are still assuming zero hikes for 2019-20, our DPU estimates and valuations have upside potential.
Recovery underway, especially for industrial
- Industrial REITs reported the strongest double-digit y-o-y jumps in NPI, helped primarily by acquisitions completed earlier. Large-cap DPUs were up 4.4-6.1% y-o-y, led by their sizeable overseas deals and 2.0-6.6% portfolio rental reversions. We continue to see:
- stabilising rents – JTC’s all-industrial rental index was flat in 1Q19; and
- easing supply, at +1.7% pa for 2019-21E vs +3.3% in 2014-18.
- Demand remains tilted towards newer business parks and high-spec properties with more than half of the new supply meant for single-owner use by the likes of Razer, Grab and PBA Group etc, according to CBRE. We see the gap widening for rents between newer and older business parks, given occupiers’ continued preference for quality space. Meanwhile, high-spec-building rents could rise 3-5% pa.
- Our expectations of a DPU recovery in 2019 are largely premised on the REITs’ growing pool of overseas assets. Over in Singapore, tenants may hold back their expansion given uncertain macros, suggesting a slower recovery in rents.
- Retail REITs’ NPI and DPU growth was muted, except for CAPITALAND MALL TRUST (SGX:C38U). CapitaLand Mall Trust’s NPI and DPU rose 11.5% and 3.6% y-o-y, following its acquisition of a remaining 70% interest in Westgate. Funan’s redevelopment is near completion, and set for a 28 Jun 2019 opening, two months ahead of plan; it has already achieved 92% pre-commitment for its retail space. This cements our 5.4% 2-year DPU-growth forecast.
- We believe REIT-owned malls will continue to outperform the broader market in both occupancy and rents. We reiterate our preference for large destination malls and suburban retail assets, which have been more resilient to online competition and weaker tourist spending. FRASERS CENTREPOINT TRUST (SGX:J69U) has deepened its suburban footprint with its Waterway Point deal in May, backed by SGD421.7m of fresh equity.
- Hospitality REITs mostly reported weaker DPUs as hotel RevPARs softened y-o-y against 2018’s stronger corporate-event calendar and a slowdown in tourist arrivals. We cut FY19-20E DPUs by 1-3% following recent weaker-than-expected results.
- Still, we see a firm DPU recovery from:
- favourable supply of +1.3% pa over 2018-22E from +5.5% in 2014-18; and
- RevPAR upside to our 3-5% y-o-y pa estimates, following Singapore’s longest-ever RevPAR downcycle.
- Tight 4% domestic yields should continue to push REITS overseas, into developed markets. These growth efforts will see support from low funding costs, especially in Europe.
Yield + growth favours industrials, hospitality, offshore
- Following the sector’s YTD yield compression, we rank S-REITs now on their total yield-and-growth DPU profiles. We believe that investors eyeing returns from both DPU yields and growth will continue to find value in them.
- Though dividend yields have tightened for many of the large-cap and more-liquid S-REITs under our coverage, these REITs are expected to deliver 1.9-5.4% 2-year DPU growth, in addition to 2019E DPU yields of 4.8-8.0%. ASCENDAS REIT (SGX:A17U) trades at 5.8% DPU yields and is expected to book 4.3% DPU growth on the back of a sector recovery.
- We have tilted our bias towards industrial REITs, ahead of hospitality and followed by retail. This is also due to DPU cuts for hospitality REITs following their slower-than-expected Mar 2019 quarter.
- Investors should also consider offshore REITs, specifically SASSEUR REIT (SGX:CRPU), CROMWELL EUROPEAN REIT (SGX:CNNU), FIRST REIT (SGX:AW9U) and CAPITALAND RETAIL CHINA TRUST (SGX:AU8U). These trade at 7.2-9.1% 2019E DPU yields and may deliver 2.6-6.0% DPU growth over 2018-20E, based on our and consensus estimates.
Recent S-REITs sector report:
- 3 Apr 2019: Singapore REITs - Patience Rewarded.
- 27 Feb 2019: Singapore REITs - Easing Into Recovery Mode.
- 17 Jan 2019: Singapore REITs - Yielding Growth.
Top S-REIT BUYs
- Largest and most liquid S-REIT. Rising overseas exposure to offset lower Singapore contributions 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 AUM. Following its UK entry and a stronger sponsor pipeline after the CAPL-Ascendas Singbridge merger, further diversification is possible which could provide upside to our FY19-21E 3.0% DPU CAGR.
- See report: Ascendas REIT - Maybank Kim Eng 2019-04-30: Growth From A Broader Base.
- Visible growth drivers from its
- AEI at 30A Kallang Place,
- recently completed Sunview 1 BTS data centre, and
- recent acquisition of 18 Tai Seng from sponsor.
- US data-centre contributions could rise in FY20. Low 33.8% gearing and clear acquisition-growth potential could provide upside to our 3-year 5.0% DPU CAGR forecast.
- See report: Mapletree Industrial Trust - Maybank Kim Eng 2019-04-23: Hi-Tech Play.
- Top hospitality pick, as scale and liquidity render it a good proxy for a sustained recovery in Singapore’s hospitality sector. Overseas expansion has gained traction, with its continued push into Europe supported by positive carry from low funding costs. Low 35.1% gearing and an estimated SGD550m of debt headroom suggest upside from potentially DPU-accretive deals.
- See report: CDL Hospitality Trusts - Maybank Kim Eng 2019-05-02: Recovery Slower, But Intact.
- The only pure exposure to our expected rebound in Singapore hospitality. Rising contributions from its recently-acquired Oasia Downtown, an expected 3% 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 - Maybank Kim Eng 2019-04-25: Slow Start; Recovery Underway/
- Our only BUY among retail REITs for its strengthening suburban-mall footprint, visible growth drivers and potential acquisition catalysts. Gearing of 28.8% and SGD400m of debt headroom should support acquisitions. Sponsor’s pipeline assets – Northpoint City’s South Wing and 33% interest in Waterway Point acquired in May 2019 - could strengthen its suburban footprint.
- See report: Frasers Centrepoint Trust - Maybank Kim Eng 2019-05-16: Deepening Suburban Reach.
Chua Su Tye
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-06-06
SGX Stock
Analyst Report
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SAME
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