REIT - CGS-CIMB Research 2020-03-04: More Tailwinds For SREITs

REIT - CGS-CIMB Research | SGinvestors.io FRASERS CENTREPOINT TRUST (SGX:J69U) CAPITALAND MALL TRUST (SGX:C38U) CAPITALAND COMMERCIAL TRUST (SGX:C61U) ASCOTT RESIDENCE TRUST (SGX:HMN) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) 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) FRASERS COMMERCIAL TRUST (SGX:ND8U) KEPPEL REIT (SGX:K71U) OUE COMMERCIAL REIT (SGX:TS0U) MANULIFE US REIT (SGX:BTOU) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) SPH REIT (SGX:SK6U) STARHILL GLOBAL REIT (SGX:P40U) PARKWAYLIFE REIT (SGX:C2PU)

REIT - More Tailwinds For SREITs

  • Upgrade SREITs to Overweight as we expect more tailwinds from the benign interest rate environment, with high probability of more US Fed Fund cuts.
  • In tandem with the US Fed Fund rate cut, we tweak our SG risk free rate assumptions by 30bp to 1.7%, and lower COE by 0.14-0.3% pts. This resulted in an uplift to our DDM-based TPs across the board, by 0.8- 8.6%.
  • Our top picks are CapitaLand Mall Trust, Frasers Centrepoint Trust and Capitaland Commercial Trust.



REIT - Upgrade to Overweight

  • We upgrade SREITs to Overweight as we expect more tailwinds from the benign interest rate environment.
  • The US Federal Reserve (the Fed) cut its federal funds rate cut in Mar 2020; we think there is a high probability of more cuts by the Fed down the road as the virus pandemic continues to weigh on global macroeconomic outlook. To be sure, data points for Feb announced so far, such as China’s Feb PMI numbers, indicate a sharp slowdown during the month and with the virus spreading to parts of Europe, Middle East and USA, economic activity is likely to remain constrained. The Singapore government had also revised down its 2020 GDP growth forecast to -0.5% to 1.5%, from 0.5-2.5%. Against this backdrop, we believe investors will continue to remain risk-off and prefer REITs due to their more resilient income profile.
  • Despite the sell-down in SREITs towards the end of Feb, SREITs have clawed back some of the recent losses and are now only 3.4% below the Feb peak and still outperforming the broader market.


Paying more for safety

  • SREITs are currently trading at 1.1x P/BV and at 4.5% forward dividend yield, implying 310bp over the 10-year Singapore government bond yield. We think this price retracement offers investors an opportunity to buy on dips into a sector that offers earnings visibility amid a low interest rate environment.


Sound balance sheets

  • SREITs' balance sheet remain robust. As revealed in their 4QCY19 results, their end-2019 gearing averaged 35% while interest cover was high, ranging from 2.9x to 14.1x. Meanwhile, only 20% of total SREIT sector debt is on floating rate basis.
  • We believe as interest rate outlook continues to remain benign, there is room for SREITs to refinance their existing debts at cheaper rates or extend debt maturity at minimal incremental cost. Moreover, with low funding cost and elevated valuations, SREITs can continue to explore inorganic growth opportunities via new acquisitions.


Prospects of DPU growth

  • We project SREITs’ DPUs to grow c.2.2% in 2020F, and a further 2.6% in 2021F. Our numbers have imputed acquisitions that have been announced and concluded, or pending completion, but exclude mergers such as Frasers Logistics & Industrial Trust/Frasers Commercial Trust and CapitaLand Mall Trust/Capitaland Commercial Trust. We believe key performing sectors in 2020F include industrial, commercial, and selected retail e.g. sub-urban malls.
  • On the other hand, we foresee hospitality REITs to be impacted by sector DPU decline in 2020F before a rebound in 2021F.


Ground checks

  • The direct impact of Covid-19 on earnings is indeed apparent for sectors such as hospitality and retail -- we can gauge that from factors such as lower footfall, mall or outlet closures, and slower leisure and corporate travel. However, the indirect impact of Covid-19, due to prolonged slowdown in economic activity, on sectors such industrials, are still to be assessed.
  • Our ground checks provided some insights:
    • Industrial - Our checks with selected industrial space landlords so far have not found any significant disruptions to their operations, although there is a prevailing sense of caution over the impact from Covid-19. Occupancies remain stable. The risk is if the impact of the virus outbreak prolongs and the resultant weaker economic outlook may have some knock-on impact on operational cashflow and rental reversion prospects. Our current expectation is that overall rental growth will be flat, with a sight positive bias for business parks and data centre rents.
    • Retail - Findings from our checks with landlords indicated that footfall at malls has recovered substantially but still below pre-Covid 19 level. The tenant sales of Orchard Rd malls remained relatively weak due to lack of tourists while suburban malls saw stronger traffic recovery although still not back to pre-Covid 19 levels. Landlords generally do not expect large impact on rental reversions as lease tenure is usually 2-3 years. We now expect flat rental reversion for retail malls this year versus 2-3% previously.
    • Office - Our checks with landlords so far have not found any significant direct impact from Covid-19. Occupancies remain stable. The risk is if the impact of the virus outbreak prolongs and the resultant weaker economic outlook have some knock-on impact on rental reversion prospects as well as demand for office space. We expect spot office rents to stay flat in 2020F.
    • Hospitality - Our checks with the hotel REITs found occupancy have declined to 30-60% for the month of Feb 2020 (from an average of 80% pre-Covid-19) with no recovery seen so far. However, room rates have been holding up relatively well. Most of the REITs will take the opportunity to perform asset enhancement initiatives (AEIs). We project 2020F industry revenue per average room (RevPAR) to decline 15-20% before rebounding strongly in 2021F. In 2003, which was impacted by the SARS outbreak, RevPAR declined 17% y-o-y.


Valuation & Recommendation

  • In terms of valuation, in tandem with the Fed Fund rate cut, we tweaked down our Singapore risk free rate assumptions by 30bp to 1.7%. Accordingly, our cost of equity assumptions for SREITs have also declined by 0.14-0.3% pts, resulting in an uplift to our DDM-based TPs by 0.8-8.6%. See details in PDF report attached below.
  • Our preferred picks in the SREIT sector are CapitaLand Mall Trust (SGX:C38U) (ADD, Target Price: S$2.75), Frasers Centrepoint Trust (SGX:J69U) (ADD, Target Price: S$3.10), and CapitaLand Commercial Trust (SGX:C61U) (ADD, Target Price: S$2.28). We expect these REITs to outperform the sector, given their income resilience, while their robust balance sheets would enable them the further explore inorganic growth opportunities.

CapitaLand Mall Trust (SGX:C38U)



Frasers Centrepoint Trust (SGX:J69U)



Capitaland Commercial Trust (SGX:C61U)






LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report ADD MAINTAIN ADD 3.10 UP 2.890
ADD UPGRADE HOLD 2.75 UP 2.640
ADD MAINTAIN ADD 2.28 UP 2.250
HOLD MAINTAIN HOLD 1.41 UP 1.340
HOLD MAINTAIN HOLD 1.57 UP 1.500
HOLD MAINTAIN HOLD 0.68 UP 0.650
HOLD MAINTAIN HOLD 3.35 UP 3.140
ADD MAINTAIN ADD 0.63 UP 0.600
HOLD MAINTAIN HOLD 1.32 UP 1.310
HOLD MAINTAIN HOLD 2.17 UP 2.030
ADD MAINTAIN ADD 2.66 UP 2.53
HOLD MAINTAIN HOLD 1.63 UP 1.590
ADD MAINTAIN ADD 1.72 UP 1.710
ADD MAINTAIN ADD 1.38 UP 1.350
HOLD MAINTAIN HOLD 0.54 UP 0.530
ADD MAINTAIN ADD 1.15 UP 1.120
HOLD MAINTAIN HOLD 2.61 UP 2.390
ADD MAINTAIN ADD 1.24 UP 1.160
HOLD MAINTAIN HOLD 0.79 UP 0.750
HOLD MAINTAIN HOLD 3.38 UP 3.320



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