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 share price has declined ~10% from its YTD peak of S$2.62 on 24 Jan 2020, a day after the confirmation of the first Covid-19 case in Singapore. CapitaLand Mall Trust is currently trading at below -1 s.d. yield spread of 3.5%. It is also trading at 1.13x P/BV vs. Frasers Centrepoint Trust and CapitaLand Mall Trust's 1.35x. Based on our sensitivity analysis,
- a one-time rent rebate of half-a-month for 10% of its tenants,
- 3-6 months’ impact of zero variable income from 10% of its tenants, and
- a 3-month-long 10% impact from free parking during lunch and dinner will reduce our FY20F DPU by 1-1.2%.
- Even if we assume a prolonged 6-month Covid-19 impact on 50% of its tenants or car traffic, our FY20F DPU still gives a 5% yield (from 5.4% now). At current price and based on its 5-year average yield spread of 3.2%, we estimate that the market has priced in 11% DPU downside from Covid-19 which we see as too pessimistic. We believe the impact from Covid-19 will be short term and its recent share price weakness provides a good opportunity to accumulate the stock.
- See Capitaland Mall Trust Share Price; Capitaland Mall Trust Target Price; Capitaland Mall Trust Analyst Reports; Capitaland Mall Trust Dividend History; Capitaland Mall Trust Announcements; Capitaland Mall Trust Latest News.
Frasers Centrepoint Trust (SGX:J69U)
- We continue to like Frasers Centrepoint Trust for its focus in suburban malls and potential asset acquisitions from Real Estate Asia Retail Fund Limited (PREAFL). As Frasers Centrepoint Trust is a suburban mall-focused landlord, we expect it to be more resilient compared with other retail REITs. Our ground checks recently found that suburban malls have generally been able to weather the impact of the Covid-19 outbreak better than other malls in the city.
- We believe the impact from Covid-19 would be short term for Frasers Centrepoint Trust. We believe the full-year contribution from its acquisition of Waterway Point, which is located in the developing Punggol area, would reduce the impact of Covid-19 on Frasers Centrepoint Trust's bottomline in FY20F.
- See Frasers Centrepoint Trust Share Price; Frasers Centrepoint Trust Target Price; Frasers Centrepoint Trust Analyst Reports; Frasers Centrepoint Trust Dividend History; Frasers Centrepoint Trust Announcements; Frasers Centrepoint Trust Latest News.
Capitaland Commercial Trust (SGX:C61U)
- Capitaland Commercial Trust’s has high income visibility with portfolio occupancy of 98% and a well-spread lease expiry profile. It has a remaining 17% of leases due to be recontracted in FY20F. Its average expiring Singapore office rent of S$9.43psf is still slightly below current spot market rents, thus enabling the REIT to enjoy positive rental reversions.
- Capitaland Commercial Trust's balance sheet is strong, with a gearing of 35.1% as at end-Dec 2019. Capitaland Commercial Trust is currently trading at 4.7% FY20F DPU yield, which translates to a 330bp spread above the Singapore 10-year government bond yield.
- See Capitaland Commercial Trust Share Price; Capitaland Commercial Trust Target Price; Capitaland Commercial Trust Analyst Reports; Capitaland Commercial Trust Dividend History; Capitaland Commercial Trust Announcements; Capitaland Commercial Trust Latest News.
LOCK Mun Yee
CGS-CIMB Research
|
EING Kar Mei CFA
CGS-CIMB Research
|
https://www.cgs-cimb.com
2020-03-04
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