REITs - CGS-CIMB Research 2019-08-20: Growth To Continue


REITs - Growth To Continue

Turning subsector agnostic with bottom-up stock picking approach

  • The FSTREI continued to power on in this benign interest rate environment, up 5.5%/8.4% YTD on a 3-month/6-month basis. SREITs under our coverage are currently trading at 1.13x P/BV and average 4.6% dividend yield.
  • We turn subsector agnostic on moderated growth outlook following recent ground checks, and adopt a bottom-up stock picking approach. With ample liquidity and low cost of capital, we anticipate SREITs to continue seeking inorganic growth opportunities.
  • Our sector picks include MAPLETREE COMMERCIAL TRUST (SGX:N2IU) and FRASERS CENTREPOINT TRUST (SGX:J69U) given their more resilient characteristics in the face of slower macro outlook, as well as FRASERS LOGISTICS & IND TRUST (SGX:BUOU) for its longest WALE of 6.3 years among industrial (ex-data centre) REITs.
  • Catalysts include accretive new acquisitions while downside risks include a protracted downturn.

Retail and office continue to enjoy positive rental reversions

  • Retail REITs continue to deliver encouraging operating performances with improvements in shopper traffic and tenant sales, despite the slower retail sales environment. Rental reversions were positive in the range of 2-7% in 1H19 while occupancy remains stable.
  • We anticipate retail REITs to continue delivering modest but positive rental reversions. They are also undertaking asset enhancement activities and acquisitions to bolster bottomline growth.
  • Office REITs enjoyed income uplift on rental renewals and new acquisitions, although there were some frictional vacancies due to tenant movements. The outlook for office REITs remains fairly upbeat with positive renewals as previous trough rents are rolled over.
  • Whilst supply outlook remains limited over the next 2 years, property consultants are citing peaking rental growth and expect slower momentum going forward, due to concerns over slower economic growth prospects.

Moderated outlook for industrial and hospitality sectors

  • Industrial REITs’ 2QCY19 operating metrics softened as occupancies were generally lower and rental reversions were less positive than in previous quarters. Outlook was also more muted as many cited trade tension headwinds leading to overall flattish rental reversions. That said, the supply of warehouse space in Singapore is tapering and this should provide some rental stability.
  • Hospitality REITs reported negative RevPAR growth in 1H19. Going into 2H19, we believe that RevPAR growth will continue to be slow as both leisure and corporate travel may remain weak on slower macro outlook. Hoteliers have toned down their 2H19 expectation to a flat RevPAR performance.
  • While MICE events are likely to be better h-o-h in 2H, they will likely remain quieter compared to a year ago. In addition, the slower economic conditions would also continue to dampen the demand for business travel. We think 2020 should be a better year given the return of biennial events while supply stays low.

Acquisition growth opportunities remain in the limelight

Ground checks post results

  • Our recent ground checks revealed that operating metrics have generally remained relatively robust amongst the various property subsectors. While the operating environment has remained challenging due to a slower growth outlook, SREITs continued to deliver income growth via both organic drivers as well as through additional income from new acquisitions.
  • Looking forward, we anticipate this scenario to continue into 2H19. With moderate lease expiries, low gearing and well staggered debt maturities, SREITs provide good earnings visibility. In addition, inorganic growth prospects remain within reach with a low cost of capital.

RETAIL REITs – Defying the weak operating environment

  • Considering the slower retail environment, the REITs’ operating performance was encouraging. Rental reversions were positive in the range of 2-7% while occupancy remained high and stable at 97-99%. Shopper traffic grew and tenant sales generally improved y-o-y. This proved the ability of REIT-managed malls to outperform the soft retail sales environment.
  • In the recent set of results, most retail REITs, except for FRASERS CENTREPOINT TRUST (SGX:J69U) and STARHILL GLOBAL REIT (SGX:P40U), reported results that were in line with our expectations. Frasers Centrepoint Trust’s results were below expectations mainly due to higher-than-expected finance cost while Starhill Global REIT was impacted by weaker performance from Wisma Atria.
  • In order to drive DPU growth continuously, the REITs have been undertaking asset enhancement initiatives (AEIs) actively.
    • Frasers Centrepoint Trust is building an underground pedestrian link (UPL) between Woods Square and B1 of Causeway Point; this commenced in Apr 2019 and is targeted to be completed by Dec 2019. This should help to improve traffic flow and increase income from B1 slightly.
    • CAPITALAND MALL TRUST (SGX:C38U), on the other hand, reopened Funan on 28 Jun 2019 with 98% of the space leased.
    • MAPLETREE COMMERCIAL TRUST (SGX:N2IU) had also just completed its refurbishment which includes the extension of level B1, installation of new escalator to improve vertical connectivity and opening a new library at level 3.
  • On the acquisition front, Frasers Centrepoint Trust had completed the acquisition of 18.8% of PGIM Real Estate Asiaretail Fund and 33.3% of Waterway Point (a suburban mall in Punggol) in Apr and Jul 2019 respectively.

OFFICE REITs – positive reversions continue

  • The outlook for office REITs remains fairly upbeat with renewals expected to remain positive as previous trough rents are re-contracted. Leasing appetite continues to come from technology, media and telecom (TMT), co-working and financial services sectors.
  • Office supply remains low over the next 2 years, which should be supportive of rents. That said, landlords and property consultants are citing peaking rental growth and expect slower momentum going forward, after the strong 18-month run-up, due to concerns over slower macro outlook and the spillover from trade war concerns.
  • In 2QCY19 results, office REITs reported earnings that were broadly in line with our forecasts. While all reported positive rental reversions on renewals and high occupancies, there were some frictional vacancies due to tenant movements and to a lesser extent, forex volatility. This was offset by contributions from new acquisitions as well as capital top-ups, largely from asset divestment gains – the latter made up 4.7-28.8% of this quarter’s distribution income for select office REITs.
  • Office REITs such as CAPITALAND COMMERCIAL TRUST (SGX:C61U) and FRASERS COMMERCIAL TRUST (SGX:ND8U) have outperformed other office peers and the broader FSTREI Index YTD. Post-results, while we maintain our ADD ratings for most office REITs, with slower rental growth momentum outlook, we believe this sector could perform in line with the broader REIT sector, going forward.

INDUSTRIAL REITs – lower for longer

  • The outlook for industrial REITs has turned more muted as many industrial landlords cited headwinds from the trade tensions, leading to an overall flattish guidance for rental reversions. The flat rental trend is also reflected in the overall industrial property market as JTC reported no change in occupancy rates of industrial space and only 0.1% growth in the rental index q-o-q in 2Q19.
  • In the latest 2QCY19 results, industrial REITs reported numbers that were in line with our forecasts, with the exception of CACHE LOGISTICS TRUST (SGX:K2LU) which had significant non-renewals. Despite results being broadly in line, operating metrics softened as occupancies were generally lower and rental reversions were less positive than previous quarters.
  • Results were largely driven by contributions from new acquisitions. Post-results, we downgraded MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) and KEPPEL DC REIT (SGX:AJBU) due to 5-year high valuations and upgraded FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) due to more favourable supply-demand dynamics in Australia and as we believe the weak A$ is priced in.
  • While we still like Keppel DC REIT for its strong fundamentals and potential acquisition of SGP 4, we think investors could wait for a better entry price.
  • We also raised Frasers Logistics & Industrial Trust’s rating up to ADD due to reasons above and the lower risk profile of its portfolio as it has a lower amount of expiries (c.13%) over the next 2 years compared to c.30% for ASCENDAS REIT (SGX:A17U), MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) and MAPLETREE LOGISTICS TRUST (SGX:M44U).

HOSPITALITY REITs – dragged down by slower economic outlook

  • Moving forward to 2H2019, we believe that RevPAR will continue to be slow as tourist arrivals may continue be weak. Although there are few larger events in 2H19 (CommunicAsia in Jun, International Champions Cup Singapore football championship in Jul and Grand Prix in Sep) which would attract tourists, there were also biennial events such as International Water Week in Jul 2018 and events related to Singapore’s ASEAN chairmanship throughout 2018 as well as the Bloomberg Forum in Nov 2018. In addition, the slower economic growth outlook would also continue to dampen the demand for business travel. We think 2020 could be a better year given the return of biennial events while supply stays low.
  • CDL HOSPITALITY TRUSTS (SGX:J85)’s 2QFY19 results came in line after our downward revision recently while FAR EAST HOSPITALITY TRUST (SGX:Q5T)’s results were weaker-than-expected. The weak results were not entirely a surprise given the slow tourist arrivals which grew by an anaemic 1.4% y-o-y in 6M19 due to economic uncertainty and the absence of biennial Food&HotelAsia event. CDL Hospitality Trusts and Far East Hospitality Trust’s 1H19 RevPAR of -2.1% y-o-y came in weaker than the industry RevPAR which was flat in 6M19. We attribute this to the more intense competition within the upscale and mid-tier segments. Softer demand aside, CDL Hospitality Trusts was also impacted by the ongoing room refurbishment and repairing works in few of its hotels as well as the rebranding exercise of its Raffles Maldives. Far East Hospitality Trust had also received group bookings from journalists during the Trump-Kim event in Jun 2018 and the effect of the acquisition of Oasia Hotel Downtown normalised in 2Q19.
  • We downgraded Far East Hospitality Trust from Add to HOLD post results. Its share price has appreciated strongly since Jan 2019. Without any major catalyst, we believe that its share price will hover at the current levels. While its Sentosa hotels are performing well since the opening in Apr 2019, we only expect earnings impact by end-2020.
  • We continue to like CDL Hospitality Trusts. We expect stronger 2H29 as Raffles Maldives Meradhoo opens its doors gradually and the refurbishments at Orchard Hotel (accounted for 21.3% of CDL Hospitality Trusts’s FY18 Singapore NPI) are completed by 3Q19.

Inorganic growth prospects

Valuation and recommendation


  • We expect Mapletree Commercial Trust’s largest asset, Vivocity which accounted for 46% of its 1QFY20 NPI, to continue to deliver positive rental reversion, supported by asset enhancement initiatives, tapering retail supply and its status as a destination mall. The new anchor tenant, NTUC Fairprice opened its doors on 16 Jul 2019 while majority of new/expanding tenants located in the 24,000 sq ft of recovered anchor space have also started operations since May 2019. This will boost its tenant sales and traffic flow in the coming quarters.
  • We also expect its office/business park assets to benefit from the increasing office rental as more tenants look for cheaper alternatives in decentralised areas.
  • Nonetheless, the major catalyst for the stock would be the acquisition of its largest asset, MBC II from its sponsor which would boost our FY20-21 DPU by about 5% based on our base case scenario of 5.5% acquisition yield and 60% debt funded.
  • Mapletree Commercial Trust is our top pick in the subsector and remains an ADD with a target price of S$2.24. See report: Mapletree Commercial Trust - A Good Start.


  • We also like Frasers Centrepoint Trust as a resilient suburban mall operator. Suburban malls which are conveniently located near the residences will be less impacted by the weak retail spending, we believe. This is particularly true for its two largest malls, Causeway Point and Northpoint City North Wing which are the main malls in Woodlands and Yishun, the two most populated areas in Singapore.
  • We see more room for growth in these two malls, driven by asset enhancement initiatives as well as stronger traffic as the phase 1 of the Thomson East Coast MRT line opens later this year. There are also plans to open a community centre and set up a bus interchange which will be connected directly to North Point City South Wing.
  • The acquisition of Waterway Point recently further solidifies Frasers Centrepoint Trust’s position as a suburban mall operator while the acquisition of PGIM provides Frasers Centrepoint Trust with more asset injection opportunities in asset-scarce Singapore in the long term.
  • We maintain ADD on Frasers Centrepoint Trust with a target price of S$2.79. See report: Frasers Centrepoint Trust - Acquisitions To Fuel Growth In FY20.


LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-20
SGX Stock Analyst Report ADD MAINTAIN ADD 2.240 SAME 2.240