Singapore REITs - Maybank Kim Eng 2020-03-02: Growth Matters


Singapore REITs - Growth Matters

Macros conducive, prefer industrial REITs, Upgrade CMT

  • S-REITs have pulled back with the market and now trade at 4.5% FY20E div yield and 1.04x P/BV. We expect valuations to stay elevated against the negative macro undercurrents and a lower interest rate regime. (see S-REITs share price performance)
  • DPUs for S-REITs are well-backed by their cashflows, especially for our preferred industrial and US office sector REIT names.
  • We believe the acquisition theme will continue to take centre stage against slower DPU recovery, while scale aspirations and index inclusion could spur further consolidation among the smaller names. Balance sheets are strong, with debt headroom set to rise on possible higher leverage limits.
  • We maintain our sector bias towards industrial REITs, and lowered earnings for hospitality given low DPU visibility and downside risk. US office S-REITs fundamentals are favourable and stay within our preferred picks into 2020.

Acquisitions, further overseas diversification

  • We expect the S-REITs to continue with their buying spree, which gained traction since 3Q19, as they push ahead on overseas diversification. The industrial REITs, urged to mitigate weaker Singapore NPIs, were the most aggressive on the acquisition front in 2019. Post their recent deals, overseas AUMs for the S-REITs are now at 24-70% of the total, up from 9-67%.
  • Overseas assets, mostly freehold, with their longer WALEs and leases embedded by annual rental escalations should support DPU visibility, and continue to strengthen the REITs’ AUM profile. We expect their NPIs to rise in line with the higher contribution from their overseas properties.
  • We believe the industrial REITs will continue to play into the acquisition theme, as assets are generally priced at higher cap rates relative to retail and office. Moreover the REITs’ earlier deals were substantial, but were mostly funded by equity despite their ample debt headroom.
  • Meanwhile, DPU yields have compressed following growth in their AUMs and funded by new equity, against a backdrop of strong market liquidity. This should strengthen support for further DPU-accretive deal opportunities. We believe that Ascendas REIT (SGX:A17U) and Mapletree Industrial Trust (SGX:ME8U) could see the strongest accretion from deals, given their high debt headroom and visible pipeline assets.

Consolidation for scale, index inclusion

A number of S-REITs sharing sponsors announced acquisitions or mergers in 2019.

  • OUE Commercial REIT (SGX:TS0U) and OUEHT in Apr 2019 said they would merge to create the eighth largest S-REIT with a SGD6.7b combined AUM and tenth largest by market cap. Its NPI would be supported by office (60%) and hospitality assets (40%).
  • Frasers Logistics & Industrial Trust (SGX:BUOU) in Dec 2019 proposed to acquire Frasers Commercial Trust (SGX:ND8U) for SGD1.54b in cash and units; the enlarged REIT would own a SGD5.7b AUM across the logistics, industrial and commercial sub-sectors, and rank amongst the ten largest S-REITs by market cap, and with a larger SGD3.0b free-float.
  • Earlier this year, Capitaland Mall Trust (SGX:C38U) announced that it would merge with Capitaland Commercial Trust (SGX:C61U) to create the largest S-REIT and third-largest commercial APAC REIT with a SGD16.8b market cap on a SGD22.9b AUM. The combined CapitaLand Integrated Commercial Trust (CICT) aims for more sizeable mixed-used acquisitions in Singapore and other developed markets.

Scale could lower interest costs, and the improved trading liquidity from a higher free-float could place S-REITs closer to inclusions into the global indices.

  • Frasers Centrepoint Trust (SGX:J69U) and Manulife US REIT (SGX:BTOU) joined the FTSE EPRA NAREIT Developed Index in Sep 2019 and Dec 2019 respectively, after growth in their AUMs and free-float market caps. Stronger investor interest has resulted in a further > 50bp compression in their dividend yields.
  • Ascott Trust (SGX:HMN) is a front-runner for index inclusion in the Mar 2020 review, with 79% of its EBITDA now generated from developed markets with AHT’s portfolio and its higher SGD2.5b free-float, which is above the SGD1.7b threshold index requirement.

We believe there could still be further consolidation based on current S-REIT shareholdings.

  • Merger activity within the Mapletree group REITs are unlikely in the near term. This is because Mapletree Commercial Trust (SGX:N2IU), Mapletree Industrial Trust (SGX:ME8U) and Mapletree Logistics Trust (SGX:M44U) have clear growth mandates within their respective commercial, industrial and industrial (logistics) sub-sectors, and already command a premium valuation relative to their large cap peers within the CapitaLand (SGX:C31) umbrella, and also have similar interest costs.
  • Amongst other standalone REITs without shared sponsors, Parkway Life REIT (SGX:C2PU) has the lowest gap towards the index threshold at 25% from its current free-float market cap.
  • However we see potential combination candidates within the stable of S-REITs managed by ESR and ARA, and which are owned by Warburg Pincus. We believe that larger REITs could potentially gain from lower borrowing costs, which are currently relatively higher at 3.0-3.9% and also better trading liquidity, as their standalone free-float market caps are > 30% below the threshold (SGD1.7b) for index inclusion.

Industrial bottoming out; downside risk for retail, hospitality

  • S-REITs have just ended their Dec 2019 quarter reporting, with stronger DPU growth achieved by the commercial REITs. Mapletree Commercial Trust (SGX:N2IU) delivered 5.6% y-o-y DPU growth, due to the better-than-expected accretion from the MBC II acquisition. Ascott Trust (SGX:HMN)’s DPU also rose 5.6%, helped by a capital distribution. Its SGD160m in residual divestment gains could boost capital distributions amid slower DPU growth.
  • A property tax rebate of 30% for hotels and serviced apartments as part of Singapore’s Budget 2020 could support the loss in operating income on the back of lower occupancies. But we expect hospitality REITs to suffer from limited near-term demand visibility as tourist arrivals could fall by 25-30% in 2020 if the Covid-19 outbreak is prolonged. We downgraded Far East Hospitality Trust (SGX:Q5T) from BUY to HOLD. Near-term DPU risks lie on the downside, with slower occupancies due to postponements and cancellations. There is seasonality in hospitality sector earnings, which are positively biased towards the 2H, and which typically generate 55-60% of the REITs’ NPIs.
  • Retail REITs are set to receive a 15% tax rebate for qualifying commercial properties but will fully pass this onto their tenants, in addition to various assistance schemes, which we think will be targeted at F&B tenants (now at 12-38% of their gross rental income) and could lower their NPIs. The retail landscape could however be supported with the delay of a GST hike in 2021, and the one-off cash hand-out for each adult Singaporean.
  • The industrial sector has likely bottomed out in our view. Ascendas REIT (SGX:A17U)’s Singapore properties achieved a stronger +8.8% rental reversion, up from +4.0% in the earlier quarter, with positive reversions across all its asset classes and better performance for its business parks (+9.2% in FY19) that resulted in a 40-50bp tightening of its cap rates.
  • US office S-REITs continued to deliver better operational performance and acquisitions. Prime US REIT (SGX:OXMU) announced a maiden deal at 6.9% NPI and a +2.7% DPU accretion. We like their long WALEs, backed by 2+% pa rental escalations.

Forecast Changes


Ascendas REIT (SGX:A17U)

Mapletree Industrial Trust (SGX:ME8U)

CDL Hospitality Trusts (SGX:J85)


See attached PDF report for S-REIT comparison table.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-02
SGX Stock Analyst Report BUY UPGRADE HOLD 2.700 SAME 2.700