Singapore REITs - DBS Research 2020-03-11: Tough Times Don’t Last, Tough REITs Do!

KEPPEL PACIFIC OAK US REIT (SGX:CMOU) PRIME US REIT (SGX:OXMU)

Singapore REITs - Tough Times Don’t Last, Tough REITs Do!

Recent conversations with clients indicate that they are looking to bottom fish a select group of S-REITs.
Worries of margin calls impacting share prices are unwarranted, in our view.
Sticking to our guns; industrial REITs preferred for their resilience; suburban REITs with fortress assets to come out strong.

Discussions on the S-REITs over the past week revolved around whether one should continue be in the S-REIT space despite its fairly premium valuations (1.1x P/NAV and forward yields of c.5.8%). It has been a yo-yo time for S-REIT prices over the past one and a half weeks. And now, with an almost 180-degree change (to cautious) in sentiment facing the markets, discussions with clients have been interesting and I would say that it has been a net positive, with approximately two-thirds (2/3) of the investors looking to bottom fish after the recent share price correction.

The last spanner in the works is the ongoing panic over the fall in oil prices which is not helping given the ongoing global slowdown from the COVID-19 global outbreak. This further clouds what is an already volatile macro outlook for the S-REITs. While the 50-bp rate cut by the FED brings a short-term respite to the sector, with FED funds rate at 1.00-1.25%, we see little room to move down (or cut) if economic fundamentals weaken further. Market consensus is pricing in a further 100-bp cut in FED funds rate to zero, ay to June.
This is expected to be music to income investors’ ears especially when the 10-year yields are projected to be anchored at around c.1.1-1.3% levels. However, it comes with some comfort that S-REITs’ yield spreads will remain wide, keeping incremental flows into the sector and valuations stable at current levels.
In terms of our valuation methodology, we have used a 2.5% risk-free rate in our estimates. Assuming if we use a 2.0% rate instead, we would see a 3-10% increase in our Target Price.

S-REIT investors, especially those who have a larger concentration of non-institutional holdings, are anxious to know if they could be facing margin calls. As some of these holdings may be leveraged, the current market sell-off may spark a possible margin call and cause a steeper-than-normal drop in prices when these investors liquidate their holdings. While investors appear to be zeroing in on the smaller market cap S-REITs and the potentially EUR/USD based S-REITs, we believe that such worries are unwarranted.
While this may not be representative of the overall sector, in our engagement with a selected group of wealth clients (including family offices) over the years, we have in many meetings found that there is greater demand for the large-cap names, despite the lower absolute yield. Average leverage ratios are also conservative.

We performed an analysis of the exposure in oil & gas firms across the sector. Our thinking is that the risk of a prolonged oil war may tighten profitability and cashflows for these firms going forward. That said, we notice that most industrial exposures are small at < 1% of portfolio revenues, with office S-REITs having exposure of between 4% and 8%. While we do not anticipate mass weakness across the oil & gas sector, the exposure is noteworthy.
See attached PDF for summary on SREITs' exposure to oil & gas firm.

As investors grapple with an increasing risk that the COVID- 19 outbreak may be more prolonged than initially expected (and now with an oil war risk in the horizon), we remain vested in selected REITs.
We prefer
- industrials (Ascendas REIT (SGX:A17U), Mapletree Industrial Trust (SGX:ME8U), Ascendas India Trust (SGX:CY6U)) for their longer weighted lease expiry (WALE) supporting distributions, and
- selected SG and US office REITs (Keppel REIT (SGX:K71U), Suntec REIT (SGX:T82U), Prime US REIT (SGX:OXMU), Keppel Pacific Oak US REIT (SGX:CMOU) and Mapletree Commercial Trust (SGX:N2IU)) for potential acquisitions driving distributions higher.
We believe that suburban retail landlords (CapitaLand Mall Trust (SGX:C38U), Frasers Centrepoint Trust (SGX:J69U)) will hold their ground better than tourist-focused malls given their focus on necessity shopping which is more defensive.
See also previous report: Singapore REITs - DBS Research 2020-03-03: Knocked Down But Not Knocked Out.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-11

SGX Stock Analyst Report BUY MAINTAIN BUY 0.900 SAME 0.900

BUY MAINTAIN BUY 1.050 SAME 1.050