Singapore REITs - Maybank Kim Eng 2020-03-17: Finding The Floors

CACHE LOGISTICS TRUST (SGX:K2LU) SPH REIT (SGX:SK6U) CAPITALAND MALL TRUST (SGX:C38U)

Singapore REITs - Finding The Floors

S-REITs have retreated 24% since Feb as the market has fallen to a ten-year low, but DPUs could see a lift from the surprise US 100bp Fed rate cut. Sector valuations are meanwhile elevated relative to historical dividend yields and P/NAVs following their strong yield compression, accretive acquisitions and index inclusion. See Share Price Performance - S-REITs Sector.
Current share prices imply most large-cap S-REITs are 11-31% below their +1-std dividend yields and 41-75% above their trough P/NAVs.
We remain selective given the challenging macro outlook, and continue to prefer industrial REITs, as they maintain growth during the current recessionary cycle from their longer WALEs, backed by rising overseas assets.

Valuations for CapitaLand Mall Trust (SGX:C38U) (BUY, Target Price SGD2.70) are compelling against its historical dividend yield and P/NAV, while SPH REIT (SGX:SK6U) (BUY, Target Price SGD1.15) and Cache Logistics Trust (SGX:K2LU) (BUY, Target Price SGD0.80) stand out with current valuations exceeding their troughs.

S-REITs have benefitted from yield compression with the best performers having re-rated due to their accretive acquisitions and index inclusion. Valuations especially for many of the more liquid large-cap names are at premiums as measured against their historical trading dividend yields and P/NAV.
Amongst our large-cap coverage names, only CapitaLand Mall Trust now trades above its 17-year mean on dividend yield and below compared to its NAV.
The industrial REITs have witnessed stronger re-rating following accretive acquisitions and we believe that valuations are supported by their improved AUM profiles - higher freehold asset mix from overseas properties and longer WALEs boosting DPU growth visibility. While demand recovery is slow against challenging macros, the supply outlook is benign across the various sub-sectors.

We estimate the historical troughs and 2-std valuations from their current means for both dividend yields and P/NAV for selected S-REITs. We believe that investors could revisit these valuations as their shares pull-back in line with the market’s selling activity and also after the sector’s strong outperformance.
We note that retail REITs under our coverage (except for Frasers Centrepoint Trust (SGX:J69U)) are trading above their historical mean dividend yields and at -1-std below their historical mean P/NAVs. This likely reflects the weaker retail sector outlook. Frasers Centrepoint Trust’s outperformance was supported by its inclusion in the EPRA/NAREIT Developed Asia Index in Sep 2019.
Meanwhile, we continue to note the large valuation discrepancy between the more liquid large-cap and smaller industrial REITs. Ascendas REIT (SGX:A17U), Mapletree Industrial Trust (SGX:ME8U) and Mapletree Logistics Trust (SGX:M44U) have pulled back sharply in recent days but still trade at 36-65% below trough-level dividends and 52-70% above their trough-level P/NAVs.
Valuations for the more liquid offshore S-REITs have retreated faster, with Manulife US REIT (SGX:BTOU) now trading above its 4-year trough dividend yield.
See attached PDF report for Share price sensitivity to historical div yield valuations.

Following the Fed’s 15 Feb surprise 100bps rate cut (versus MKE’s 50bps further lower 2020 expectation), we estimate a 0-4% lift to DPUs for the S- REITs on the back of lower borrowing costs, as we have already factored in a lower 25bp this year, and now see a further 50bp cut in our floating rate debt assumptions.
We expect the MAS to ease to neutral bias or zero appreciation of the S$NEER in the Apr 2020 meeting. We lower our 3M SIBOR forecast to 0.6% by year end, which was trading at 1.22% as of 13 Mar – see Singapore Economics 17 Mar 2020 - Exports Post Surprise Growth in Feb, But Tumbles to China.
The REITs in general have strong balance sheets and they also exercised discretion against the underlying interest rate variability and maintained high fixed debt ratios (which averaged 77.9% as of end-Dec 2019). The sector’s average leverage was 35.4% at end-Dec 2019. This is well below the MAS’s 45% limit threshold, which suggests debt headroom of 3-37% of their AUMs.
See attached PDF report for S-REITs valuation peer comparison.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-17

SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800

BUY MAINTAIN BUY 1.150 SAME 1.150

BUY MAINTAIN BUY 2.700 SAME 2.700