Singapore REITs - OCBC Investment 2019-11-15: Let’s Go With The Big Guns


Singapore REITs - Let’s Go With The Big Guns

3QCY19 results largely met expectations; projecting stronger growth in FY20/21F

  • For the recently concluded 3QCY19 earnings season, out of the 21 S-REITs under our coverage, 19 reported results which met our expectations, while CACHE LOGISTICS TRUST (SGX:K2LU) and SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) fell short.
  • DPU grew 1.2% y-o-y on a market-cap weighted basis. Out of our coverage universe, 11 REITs delivered positive y-o-y DPU growth, eight saw a weaker performance and two had unchanged DPU.
  • Looking ahead, we are projecting stable DPU growth of 1.2% (market-cap weighted) for the current financial year (FY19/20F). This is expected to accelerate to +4.0% for the next financial year (FY20/21F), underpinned largely by full-year contributions from acquisitions, asset redevelopments and biennial hospitality events.
  • Under our coverage, we forecast the strongest DPU growth for KEPPEL DC REIT (SGX:AJBU) (+13.0%), FAR EAST HOSPITALITY TRUST (SGX:Q5T) (+8.8%) and MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) (+7.6%)

Retail sector: Weak retail sales index data but retail REITs pulling different levers to deliver growth

  • Based on data from URA, the retail rental index rebounded strongly to a positive growth of 2.3% q-o-q, reversing two consecutive quarters of declines (-1.5% q-o-q in 2Q19 and -0.2% in 1Q19). If we draw reference from market watchers, the situation was more stable. According to CBRE, retail rents for all sub-markets were unchanged q-o-q in 3Q19: Orchard Road at S$31.70 psf/month, Suburban at S$29.15 psf/month, City Hall/Marina Centre at S$22.15 psf/month and Other City/City Fringe at S$17.10 psf/month.
  • All the retail REITs under our coverage delivered positive y-o-y DPU growth in 3QCY19, with the exception of STARHILL GLOBAL REIT (SGX:P40U).
  • ‘Resilience’ has been the word we have used to describe retail REITs for some time now, and this quarter was no difference, although we did notice some mixed data points, especially on tenant sales. This came in at -1.3% for CAPITALAND MALL TRUST (SGX:C38U) for the 9M19 period, -0.3% for MAPLETREE COMMERCIAL TRUST (SGX:N2IU) for 2QFY20 as VivoCity’s anchor tenant NTUC FairPrice only contributed a full month from Aug 2019. Tenants’ sales psf was flat y-o-y for FRASERS CENTREPOINT TRUST (SGX:J69U) during Jun to Aug, given the AEI at Causeway Point. Its other larger malls registered growth of 2-6% y-o-y.
  • For the overall Singapore retail market, the Retail Sales Index excluding motor vehicles has shown y-o-y declines for eight consecutive months now, but we give credit to retail REITs for their efforts to reposition their malls and deliver DPU growth via acquisitions and redevelopment projects.
  • On the rental front, within the local scene, CAPITALAND MALL TRUST (SGX:C38U), FRASERS CENTREPOINT TRUST (SGX:J69U), MAPLETREE COMMERCIAL TRUST (SGX:N2IU) and SPH REIT (SGX:SK6U) registered positive rental reversions of 1.2% (9M19), 3.9% (4QFY19), 6.8% (retail segment for 1HFY20) and 9.4% (FY19), respectively.
  • For overseas retail, CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) achieved positive rental uplifts of 7.4% in 3Q19, while MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U)’s Festival Walk saw +12% rental reversions for 1HFY20.

Office sector: Positive rental reversions to continue but sentiment has softened

  • Office REITs continued to achieve healthy rental reversions in 3Q19. This came in at +14% for KEPPEL REIT (SGX:K71U), > 20% for Suntec City Office and positive double-digit for leases signed at One Raffles Quay and the MBFC Towers 1 and 2.
  • CAPITALAND COMMERCIAL TRUST (SGX:C61U) had another solid showing, with the lowest end of its committed rents coming in above its average expired rents for the second consecutive quarter (except Raffles City Tower). Notwithstanding this robust performance, office REITs largely sounded a more cautious tone on the outlook, highlighting that business sentiment has softened.
  • CBRE data showed that core CBD Grade A rental growth stabilised at +1.3% q-o-q to S$11.45 psf/month in 3Q19, a similar growth to 2Q19. For core CBD Grade B rents, this picked up 1.2% to S$8.70 psf/month in 3Q19, versus +0.6% in the preceding quarter. Notwithstanding the plateauing growth in office rents, we are still expecting office REITs to record positive reversions in the near future, as current core CBD Grade A and B spot rents are 23% and 16% above 3Q16 levels. For example, CAPITALAND COMMERCIAL TRUST (SGX:C61U)’s average expiring rents in 2020 is S$9.60 psf/month, versus current market rents of S$11.45 psf/month as highlighted earlier.
  • A common topic during the quarter was the amount of exposure which office REITs have to co-working operators, especially WeWork, as well as the sustainability of the co-working sector. The We Company, which is the owner of WeWork, just reported that its net losses in 3Q19 more than widened to US$1.25b. From our channel checks, WeWork’s underlying utilisation for its Singapore offices are > 90%, and rental payments to Singapore office REITs have been prompt with no arrears. We estimate that exposure to co-working operators range between 3-8% for office REITs.

Industrial sector: Seeking growth overseas amid patchy data in Singapore

  • Singapore’s industrial rental growth remained flattish, based on statistics from JTC. The Rental Index of all industrial space was unchanged q-o-q in 3Q19 (2Q19: +0.1%). The Single User Factory and Business Park segments registered growth of +0.5% and +0.1% q-o-q, respectively, while Multiple-User Warehouse suffered a decline of 0.2%, a similar magnitude to 2Q19.
  • In terms of supply, approximately 340k and 1.9m sqm of industrial space is estimated to hit the market in 4Q19 and 2020, respectively. In comparison, the average annual demand and supply of industrial space was 1.2m and 1.3m sqm over the past three years, respectively.
  • In terms of performance, there was continued divergence in the industrial space, with the larger industrial REITs delivering positive DPU growth but the smaller ones suffering declines.
  • In terms of corporate actions, we saw industrial REITs leveraging on overseas markets for future growth, as exemplified by the proposed portfolio acquisitions in North America by ASCENDAS REIT (SGX:A17U) (business parks) and MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) (data centres). SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) completed its third acquisition in Australia, although this was for a office building.
  • ASCENDAS REIT (SGX:A17U) recorded positive rental reversions of 4.0% for its Singapore portfolio, and guided for a positive low single-digit rental reversion for FY19. MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)’s rental reversions for its renewal leases remained subdued in 2QFY20, with only the Hi-Tech Buildings segment recording a positive rental uplift. Conditions may improve in 3QFY20, although uncertainties will continue to linger, in our view.

Hospitality sector: Recovering RevPARs and biennial events to look forward to in 2020

  • International visitor arrivals to Singapore gathered momentum in 3Q19, possibly benefiting from a spillover effect given the social unrest in Hong Kong. Growth for the months of Jul, Aug and Sep came in at +4.0%, +3.1% and +3.3% y-o-y, respectively. From Jan-Sep, visitor arrivals increased 2.1% to 14.3m.
  • As for the performance of the hotels industry, this followed a similar trend to tourist arrivals. RevPAR rose 4.2% y-o-y in 3Q19, versus -1.0% for both 2Q19 and 1Q19.
  • Data for tourism receipts (TR) were only available up till 1H19. This disappointed as it was down 3.0% y-o-y to S$13.1b. Declines were seen for Accommodation (-13%), F&B (-3%) and Sightseeing, Entertainment & Gaming (-1%), but partially offset by a recovery in Shopping (+11% in 1H19 versus -7% in 1Q19). Other TR Components was flat.
  • Hospitality REITs had another poor quarter in terms of DPU performance, as the more vibrant local environment was offset by weakness from overseas. There was negative y-o-y DPU growth for CDL HOSPITALITY TRUSTS (SGX:J85) (-4.1%) and FAR EAST HOSPITALITY TRUST (SGX:Q5T) (-1.0%).
  • ASCOTT RESIDENCE TRUST (SGX:A68U)’s DPU jumped 4.9% y-o-y, but this was boosted by a one-off partial distribution of divestment gain of S$4.0m from the divestment of Ascott Raffles Place Singapore. Stripping this out, DPU would have grown 0.6%. RevPAU for ASCOTT RESIDENCE TRUST (SGX:A68U)’s Singapore portfolio grew 2% y-o-y, but there were drags from Australia (-15%; or -4% on same store basis), China (-6%) and US (-6%).
  • Similarly, CDL HOSPITALITY TRUSTS (SGX:J85)’s Singapore RevPAR rose 4.9%, but weakness was seen for New Zealand, Maldives and Japan.
  • For FAR EAST HOSPITALITY TRUST (SGX:Q5T), Singapore Hotels’ RevPAR was flat in 3Q19, but RevPAU for its Serviced Residences segment saw an uplift of 5.7% y-o-y.

Show me the money!

  • YTD, S-REITs have announced a whopping S$6.1b worth of equity offerings in the secondary markets (private placement, rights issue and preferential offering), which is already 1.6x the amount raised in 2018. The latest equity fund raising is ASCENDAS REIT (SGX:A17U)’s proposed S$1.3b rights issue, which would also be the largest quantum raised to date once completed.
  • With the FTSE Straits Times REIT Index (FSTREI) delivering total returns of 22.8% YTD (peak: +25.9%) and trading at a forward P/B of 1.15x (+1.7 standard deviations above the 8-year average), it was not surprising that most of the REITs have been able to make DPU and NAV accretive acquisitions despite the use of equity.
  • Coupled with the ample liquidity in the markets, the recent private placement exercises saw very strong demand and were ~4-13x subscribed by investors.
  • See also SGX Market Update: S-REITs Held Gains, Issued $940 million in New Units in October 2019.

S-REITs have seen a recent correction…

  • While the S-REITs sector has been in vogue this year, the FSTREI saw a sudden correction of 2.3% on 8 Nov. This was the largest single-day decline for the sector since 24 Aug 2015 (-3.8%). The following trading session saw another dip of 1.3%.
  • We believe the correction could potentially have been driven by increased optimism over the Sino-US trade situation at that point and signs of stabilisation in the macroeconomic outlook, coupled with a spike in the US 10Y Treasury yield by 11 bps over two sessions.
  • But then, further commentary from US President Trump has changed the dynamics again. Perhaps we should all be too familiar with Trump’s trade rhetoric now, and accept that uncertainties will continue to plague geopolitical relationships. Treasury yields have since come off as trade talks appear to have hit a roadblock, although this could yet change again.
  • On the Central Bank front, Federal Reserve Chairman Jerome Powell recently stated that the current monetary policy stance was likely appropriate, as the full effects of the previous rate cuts will be realised over time, while economic conditions remain firm. While this suggests a ‘pause’ in the current rate-cut cycle, we note that Powell also highlighted that inflation would need to move up significantly in a persistent manner before the Fed would consider hiking rates again.
  • The probability of a rate cut in Dec stands at a negligible 7%, based on the Fed funds futures rate. Meanwhile, there is a probability of 71% for at least one rate cut in 2020.
  • See also: SREITs Share Price Performance.

…which offers selective bargain hunting opportunities for high quality names

  • We believe the ‘flight to safety’ theme still remains valid, as lingering geopolitical and macroeconomic uncertainties are unlikely to go away anytime soon. The forward yield spread between the FTSE ST REIT Index (5.33%) and the Singapore government 10-year bond yield (1.77%) last stood at 357 bps. This is one standard deviation (s.d.) below the 8-year mean of 415 bps.
  • We maintain NEUTRAL on S-REITs, but with a bias to the upside given the recent correction, which has given rise to selective bargain hunting opportunities for some high quality S-REITs which were previously rated ‘Hold’. We thus add ASCENDAS REIT (SGX:A17U) [BUY; FV: S$3.25] and CAPITALAND MALL TRUST (SGX:C38U) [BUY; FV: S$2.73] to our top S-REIT picks alongside SUNTEC REIT (SGX:T82U) [BUY; FV: S$2.05].
  • KEPPEL DC REIT (SGX:AJBU) is removed in light of its solid share price outperformance.
  • MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U) remains a ‘Buy’ on valuation grounds, but sentiment is likely to remain weak amid escalated violence in Hong Kong. For investors who are open to taking a longer-term view and willing to accept potential near-term volatility, gradual accumulation would be the prudent approach, in our view.
  • See also: Summary of S-REITs Price Target & Ratings.

See attached 20-page PDF report for complete analysis.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-11-15
SGX Stock Analyst Report BUY MAINTAIN BUY 3.250 SAME 3.250