REIT - CGS-CIMB Research 2019-07-03: In Search Of Yield

Singapore REIT - CGS-CIMB Research | SGinvestors.io KEPPEL DC REIT (SGX:AJBU) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) ASCOTT RESIDENCE TRUST (SGX:A68U) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) OUE HOSPITALITY TRUST (SGX:SK7) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CACHE LOGISTICS TRUST (SGX:K2LU) ESR-REIT (SGX:J91U) FRASERS LOGISTICS & IND TRUST (SGX:BUOU) KEPPEL DC REIT (SGX:AJBU) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U) CAPITALAND COMMERCIAL TRUST (SGX:C61U) FRASERS COMMERCIAL TRUST (SGX:ND8U) KEPPEL REIT (SGX:K71U) OUE COMMERCIAL REIT (SGX:TS0U) CAPITALAND MALL TRUST (SGX:C38U) FRASERS CENTREPOINT TRUST (SGX:J69U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) SPH REIT (SGX:SK6U) STARHILL GLOBAL REIT (SGX:P40U) LIPPO MALLS INDO RETAIL TRUST (SGX:D5IU) MAPLETREE NORTH ASIA COMM TR (SGX:RW0U) SASSEUR REIT (SGX:CRPU) FIRST REAL ESTATE INV TRUST (SGX:AW9U) PARKWAYLIFE REIT (SGX:C2PU)

REIT - In Search Of Yield




Yield hungry in a low-rate environment

  • SREITs delivered an outperformance in 1H19, with a 21.5% total return compared to the broader market’s 10.5%. The prospect of Fed Fund rate cuts and a protracted low interest rate environment amid the possibility of slower global growth, has and should continue to be supportive of yield stocks, including SREITs. See S-REITs share price performance.
  • CIMB’s Treasury and Markets Research Chief Economist has projected two Fed Fund rate cuts in 2H19 followed by a period of stability in US interest rates in 1H20. Accordingly, risk-free rate assumptions in countries under their coverage, such as Malaysia, Indonesia, Singapore and Thailand, have been lowered in tandem. Against a more favourable backdrop of accommodative interest rates and dovish rhetoric, we expect S-REITs share price to be well supported.


Yields likely to remain compressed

  • SREITs under our coverage are currently trading at 4.8% yield and 1.15x P/BV, close to the +1s.d. above mean valuations. While valuations are not cheap at present, we think the benign interest rate environment would mean that valuations are likely to remain elevated in the medium term.
  • Low interest rates could also translate to potential interest cost savings or lower-than-expected interest costs on loan refinancing.


Changes in risk free rate assumptions

  • We revise our cost of equity assumption, aligning with CIMB’s Treasury and Markets research team’s reduction in bond yield projections. Accordingly, our cost of equity assumptions are lowered by c.0.3- 0.7% pts, resulting in a 2-13% rise in of DDM-based TPs, all else unchanged.

Impact of changes in cost of equity assumptions

SREIT Price as at 30 Jun 19 FY19F Yield FY20F Yield FY21F Yield Previous Cost of Equity New Cost of Equity Previous Target Price New Target Price
Hospitality
ASCOTT RESIDENCE TRUST (SGX:A68U) $1.30 5.4% 5.5% 5.6% 7.6% 7.3% $1.15 $1.22
ASCENDAS HOSPITALITY TRUST (SGX:Q1P) $0.90 6.7% 6.6% 6.7% NA NA NA NA
CDL HOSPITALITY TRUSTS (SGX:J85) $1.63 5.8% 6.0% 6.2% 8.1% 7.7% $1.85 $1.97
FAR EAST HOSPITALITY TRUST (SGX:Q5T) $0.67 6.5% 6.5% 6.7% 8.4% 8.0% $0.71 $0.76
FRASERS HOSPITALITY TRUST (SGX:ACV) $0.70 4.9% 5.0% 5.3% NA NA NA NA
OUE HOSPITALITY TRUST (SGX:SK7) $0.72 7.2% 7.4% 7.6% 8.7% 8.0% $0.85 $0.96
Industrial
AIMS APAC REIT (SGX:O5RU) $1.40 7.3% 7.4% 7.4% NA NA NA NA
ASCENDAS REIT (SGX:A17U) $3.12 5.1% 5.0% 5.2% 8.0% 7.6% $2.87 $3.08
CACHE LOGISTICS TRUST (SGX:K2LU) $0.79 7.7% 7.4% 7.5% 8.6% 8.2% $0.74 $0.78
ESR-REIT (SGX:J91U) $0.53 7.9% 8.0% 8.1% 8.1% 7.7% $0.60 $0.64
FRASERS LOGISTICS & IND TRUST (SGX:BUOU) $1.21 6.0% 5.6% 5.7% 8.2% 7.9% $1.21 $1.23
KEPPEL DC REIT (SGX:AJBU) $1.67 4.8% 5.0% 5.2% 7.7% 7.3% $1.54 $1.67
MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) $2.24 5.4% 5.6% 5.8% 7.8% 7.5% $2.17 $2.32
MAPLETREE LOGISTICS TRUST (SGX:M44U) $1.59 5.0% 5.0% 5.1% 8.2% 8.0% $1.48 $1.56
SABANA SHARIAH COMPLIANT REIT (SGX:M1GU) $0.44 NA NA NA NA NA NA NA
SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) $0.60 8.2% 8.2% 8.4% NA NA NA NA
Office
CAPITALAND COMMERCIAL TRUST (SGX:C61U) $2.17 4.2% 4.3% 4.4% 8.3% 6.9% $2.03 $2.25
FRASERS COMMERCIAL TRUST (SGX:ND8U) $1.67 5.8% 6.0% 6.2% 8.3% 7.9% $1.64 $1.71
KEPPEL REIT (SGX:K71U) $1.26 4.7% 4.9% 4.8% 7.3% 7.0% $1.34 $1.41
OUE COMMERCIAL REIT (SGX:TS0U) $0.51 6.8% 6.8% 6.8% 7.7% 7.3% $0.57 $0.61
SUNTEC REIT (SGX:T82U) $1.94 5.1% 5.3% 5.4% 7.3% 6.9% $2.06 $2.15
Retail
CAPITALAND MALL TRUST (SGX:C38U) $2.63 4.5% 4.7% 4.8% 7.2% 6.8% $2.39 $2.60
FRASERS CENTREPOINT TRUST (SGX:J69U) $2.60 5.0% 4.9% 5.0% 7.2% 6.8% $2.55 $2.78
MAPLETREE COMMERCIAL TRUST (SGX:N2IU) $2.09 4.4% 4.4% 4.5% 7.1% 6.7% $2.03 $2.24
SPH REIT (SGX:SK6U) $1.07 5.4% 5.5% 5.6% 7.2% 6.8% $1.08 $1.11
STARHILL GLOBAL REIT (SGX:P40U) $0.78 6.0% 6.2% 6.2% 7.6% 7.2% $0.77 $0.82
Retail Ex-Sin
CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) $1.52 6.7% 7.0% 7.2% NA NA NA NA
LIPPO MALLS INDO RETAIL TRUST (SGX:D5IU) $0.24 7.3% 7.5% na 10.6% 11.1% $0.20 $0.19
MAPLETREE NORTH ASIA COMM TR (SGX:RW0U) $1.46 5.2% 5.5% 5.6% 7.8% 7.1% $1.38 $1.50
MANULIFE US REIT (SGX:BTOU) $0.87 7.1% 7.2% 7.3% NA NA NA NA
SASSEUR REIT (SGX:CRPU) $0.79 8.4% 9.1% 9.8% 11.3% 10.4% $0.92 $0.95
Healthcare
FIRST REIT (SGX:AW9U) $1.03 8.6% 8.6% 8.5% 8.1% 7.7% $1.20 $1.23
PARKWAYLIFE REIT (SGX:C2PU) $3.03 4.3% 4.4% 4.5% 6.6% 6.0% $3.05 $3.14


Inorganic growth should provide further tailwinds

  • SREITs are well positioned to acquire for growth with a lower cost of capital. This should continue to drive DPU growth. In addition, the SREIT sector’s gearing averaged 36.6% at end 1Q19, well within the maximum 45% guideline. FRASERS CENTREPOINT TRUST (SGX:J69U) had completed the acquisition of its sponsor’s stake in Waterway Point in Singapore while SUNTEC REIT (SGX:T82U) has announced the purchase of an office building in Pyrmont Australia.
  • We expect SREITs to actively explore inorganic growth opportunities, both in Singapore and overseas, from third parties as well as from their sponsors’ pipelines.


Proposed changes to SREIT guidelines could fuel growth further

  • On 2 Jul, the Monetary Authority of Singapore (MAS) announced that it is proposing amendments to the Code on Collective Investment Schemes to provide SREITs with more flexibility to manage their capital structure and to streamline the fundraising process for SREITs. See report.
  • MAS is reviewing the leverage limit as well as proposing to streamline the fundraising process for REITs by removing the requirement for REITs to submit a notification to MAS to obtain a “Restricted Scheme” status when they make an offer of units to accredited and other investors. This will make the fundraising process more efficient and bring it in line with the fundraising process for companies and business trusts. On leverage ratio, MAS indicated that one possible approach could be to use a combination of leverage limit and minimum interest coverage requirement in determining the amount of leverage that REITs should be allowed to take on.
  • Based on the 1QCY19 results, most SREITs have a healthy interest coverage ratio, exceeding 2.5x, while gearing ratio average was 36.6%, well below the guideline limit of 45%. A higher gearing limit would provide SREITs with more debt headroom to fund new acquisitions. In our scenario analysis, assuming a higher gearing limit of 50%, an increase would enable SREITs to acquire to grow their portfolios significantly via inorganic means.


Sneak peek at upcoming 2Q19 results


Office - upcycle still intact

  • We expect the office rental cycle to remain intact in 2Q19, after a 2.3% increase in Grade A CBD rents in 1Q19, according to Cushman & Wakefield, driven by demand from technology and flexible workspace operators. Island-wide occupancy continued to trend up to 11.8%.
  • Looking ahead, these sectors are likely to continue to be active in the leasing market. Recently, FRASERS COMMERCIAL TRUST (SGX:ND8U) announced that it struck an agreement with Google Asia Pacific Pte Ltd to take up 344,100 sqft of space at Alexandra Technopark from 1Q2020. Our projection for a 5% hike in office rents for 2019 is maintained.
  • Furthermore, we expect the low interest rate environment to be supportive of capital values. New office transactions such as sale of 7&9 Tampines Grande for S$450m and FRASERS PROPERTY (SGX:TQ5)’s divestment of 50% stake in Frasers Tower based on an agreed property value of S$1.965bn or S$2,868psf of lettable area, continue to highlight appetite for quality assets.
  • For office REITs, we expect the positive rental reversion trend to continue into the 2QCY19, resulting in high committed occupancy. Asset values should also trend up on revaluations. DPU is expected to remain fairly stable q-o-q but higher y-o-y with no significant expiries due in 2019.

Hospitality – deep value but needs catalyst

  • For MTD Apr 19, overall tourist arrivals increased 1.63% y-o-y to 6.3m. RevPAR for the same period declined 0.3% y-o-y, below market expectations of a 3-5% RevPAR growth.
  • 2QCY19 results for hospitality REITs could continue to be weak y-o-y due to a high base in 2018, with a slew of biennial even-year events such as Food & Hotel Asia 2018 and events related to Singapore’s ASEAN chairmanship last year. The absence of such large-scale events as well as weaker corporate travel due to ongoing trade tensions would likely have a dampening effect on demand for short-stay accommodation.

Retail – slow and steady

  • Retail sales, excluding motor vehicle sales, slipped 2% y-o-y in Apr 19, on the back of declines across all categories, with the exception wearing apparel and footwear. That said, shopping malls owned by listed REITs continue to enjoy high occupancy on the back of active tenant and shopper traffic management. Tenant sales could remain relatively anemic, judging by the retail sales performance.
  • For 2QCY19, we think retail REITs would continue to deliver higher y-o-y DPU due to contributions from acquisitions made earlier, such as CAPITALAND MALL TRUST (SGX:C38U)’s purchase of the 70% of Westgate and SPH REIT (SGX:SK6U)’s acquisition of The Rail Mall and Figtree Grove. Organic rental growth is expected to remain in the low single-digits.


Industrial – limited impact from trade war for now

  • In 1Q19, industrial REITs reported encouraging results on the back of a 0.3% pt y-o-y increase in the occupancy rates and the rental index of the overall industrial property market; q-o-q both remained flat.
  • We think industrial REIT results in 2QCY19 could be driven inorganically y-o-y such as commencement of MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)’s 18 Tai Seng, although operational metrics are likely to continue to be flattish. The bifurcation of demand between higher and lower specification assets could continue, especially for logistics assets, due to automation and e-commerce requirements.
  • While the trade war has not had a significant impact on industrial REITs, corporates appear to have become more cautious in tenancy decisions and we think long drawn tensions could potentially negatively impact the whole industry. While Hyflux and CWT headlined tenant default risk in 2Q, they continue to be current with rents.


Strategy and recommendation


Stay Overweight on SREITs

  • We remain constructive on SREITs given the benign interest rate outlook. That said, valuations are trading closer to the +1 s.d. range. SREITs’ outperformance had largely been led by the large and selective mid cap SREITs, indicating little investor risk appetite. We continue to remain optimistic on the office sub-sector and rank the remaining subsectors as hospitality, retail and industrial, in order of preference.
  • Our top sector picks are Suntec REIT, Mapletree Commercial Trust and Keppel DC REIT, the latter two in anticipation of the potential new acquisitions.

SUNTEC REIT (SGX:T82U) (SUN SP, Add, Target Price S$2.15)

  • Suntec REIT remains our top pick for the office subsector due to its large exposure to the rising office rental market and improved retail performance.
  • The leasing of 9 Penang Road to UBS further strengthened earnings visibility; the property is scheduled to complete in 4Q19 and target occupation date for UBS is 2H20. We think that the reconfiguration works at Suntec Mall basement should continue to drive footfall and shopper spend. See also report: Suntec REIT - Deepens Footprint in Australia.
  • We maintain our ADD call with a higher Target Price of S$2.15.

MAPLETREE COMMERCIAL TRUST (SGX:N2IU) (Rating: ADD, Target Price S$2.24)

  • Our retail subsector top pick continues to be Mapletree Commercial Trust due to the potential acquisition of MBC II as a major re-rating catalyst; we think that this could raise FY20-21F DPU by c.5%.
  • Operationally, we see strong demand for MBC I due to its proximity to the CBD area, Grade-A office specifications and more attractive rental rates vis-a-vis CBD offices. Vivocity could also benefit from the Greater Southern Waterfront developments in the coming years.
  • We maintain our ADD call with a higher Target Price of S$2.24.

KEPPEL DC REIT (SGX:AJBU) (Rating: ADD, Target Price S$1.67)

  • KEPPEL DC REIT (SGX:AJBU) is our industrial subsector top pick due to the potential accretive acquisition of the SGP 4 data centre from its sponsor; we think that this could boost FY20F DPU by c.3%. With a current gearing of 32.5%, we think Keppel DC REIT would need to fund the purchase with a combination of debt and equity. Following this potential expansion in market cap, we think that there could also be potential for index inclusion, which could form a second catalyst for the stock.
  • Operationally, occupancy remains healthy at 93.2% with a long weighted average lease expiry of 8.0 years. Due to the low amount of upcoming expiries (2.4%/4.9% for FY19/FY20), we do not expect significant downside risk to occupancy.
  • We maintain our ADD call with a higher Target Price of S$1.67.





LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-03
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