Singapore REITs - Maybank Kim Eng 2020-05-19: In Conservation Mode


Singapore REITs - In Conservation Mode

Retaining capital and tenancies, prefer industrial

  • The S-REITs have ended their 1Q20 reporting, with a focus on capital retention, in anticipation of weaker fundamentals. Slower leasing amidst uncertain macros should challenge near-term occupancies and rents, but cashflow visibility remains strong, especially for industrial REITs, backed by rising overseas contributions, and offices, with low expiring leases and positive reversions into 2020.
  • We remain selective on retail, which faces yield expansion pressures, and hospitality with declining RevPARs.
  • Balance sheets are strong, with debt headroom boosted by higher leverage limits. We expect sector valuations to stay elevated against the negative macro undercurrents and a lower interest rate regime.
  • We maintain our sector bias towards industrial REITs, and lowered earnings for hospitality given low DPU visibility. US office S-REIT fundamentals are favourable and stay within our preferred picks into 2020.

Decent start, and conserving cash

  • Occupancies were largely stable in 1Q, with improvement in Singapore especially for industrial (logistics) space. Rental reversions were mostly positive, reflecting earlier negotiations, but leasing activity has slowed considerably since Apr. Shopper traffic and tenant sales slowed following enhanced safe distancing measures, but a pass-through of government property tax rebates helped mitigate a weaker Mar performance for retail.
  • Hospitality REITs were helped by government bookings housing returning residents, but Mar quarter occupancies fell from their five-year highs to 54-65%, resulting in 33-40% y-o-y lower RevPARs.
  • Many S-REITs retained capital, with the highest 50-100% recorded for the retail REITs.

Better visibility for industrial, office

  • We expect the full ‘circuit breaker’ impact to be felt in 2Q, which would see a sharp fall in revenue and NPI, with the effects of income loss from rent waivers.
  • Retail is likely to be the worst hit, as hospitality receives minimum fixed rents from their master leases. Lease structures could see higher GTO contributions following Covid-19.
  • Overseas assets should back DPUs for industrial, while Singapore rents are now likely to bottom out in 2021, and tenancy risk while low, could rise.
  • Office has low expiring leases in 2020 (at 5-9%) and are set to deliver positive reversions given their low expiring rents. US-focused office REITs boast even lower lease expiries for 2020 (at 4-6%) and higher div yields at > 9.0%.

Retail could face yield expansion pressure

  • Cap rates were unchanged in 1Q with stable fundamentals, but visibility is low with uncertainty on relaxation of travel restrictions and pace of economic recovery. Valuers could reassess assumptions after a prolonged Covid-19 vacancy and rental impact, and as asset availability rises with sellers facing redemption pressure or liquidity needs.
  • Findings from a flash survey by CBRE at end-Apr suggest that retail cap rates could rise by 30bp. We estimate this could lower their NAVs by 4-10%. S-REITs have been prudent in borrowing in this cycle with average leverage at 36.7%.

Retail REITs: Challenging times ahead

Occupancies fell, suburban malls holding up better

  • Singapore’s retail sector has been impacted by movement restrictions and the temporary closure of non-essential trades and services as part of ‘circuit breaker’ measures, which kicked in on 7 Apr and then extended by a month till 1 Jun. Occupancies fell q-o-q in 1Q20 even as rental reversions were positive.
  • Amidst the fall in shopper traffic and tenant sales, supermarkets were a bright spot, with many expanding delivery services to meet the surge in online orders. Suburban malls performed better, and should be more resilient in their occupancies and tenant sales recovery.

Reliefs temporary, downward rent pressure

  • We see a challenging outlook for rents, further compounded by the fact that lease negotiations take longer. Downward pressure has been mitigated by relief from landlords in the form of marketing assistance, allowing tenants to drawdown on their security deposits to offset rental payments, and the passing on of property tax rebates from the government.
  • Landlords are set to forego their fixed rents from a majority of their tenants for Apr and May, which could see revenue and NPI dip by up to two-thirds in 2Q. We believe some may need to factor in additional support packages to maintain occupancies.

Stay selective, CMT top pick

Industrial REITs: DPU lift from overseas push

Better Singapore performance

  • Industrial REITs reported stable portfolio occupancies in 1Q20, and better Singapore occupancies. This was driven by demand for hi-tech /high-specs and logistics space. Warehouse demand remains supported by buoyant e-commerce demand and surging last-mile delivery requirement, as well as for short term storage of essential goods.
  • We expect most leasing activity to be centred on renewals, given the weak business confidence, which should help support tenant retention efforts and occupancies, especially for business parks.

Rental recovery now likely in 2021

  • 1Q20 rental reversions were positive for the three large cap REITs, and in the case of Ascendas REIT (SGX:A17U), a strong +8.0% y-o-y in Singapore. Management is guiding for flat reversion for the rest of the year, down from the earlier low single-digit reversion initially expected for Singapore, and high single-digit from its overseas assets.
  • Mapletree Industrial Trust (SGX:ME8U)’s management had earlier indicated that rents were bottoming out, but now believes they could dip 2-3% this year. We expect rents could recover from 1H 2021, at the earliest.

Tenancy risks low, but could rise

  • Tenants in retail, aviation, oil & gas, and hospitality & leisure trade sectors contribute less than 10-15% of industrial REITs’ gross rental income, while SMEs are a higher 20-45%. Government measures unveiled in the Solidarity Budget 2020, which include the 30% property tax rebate for tenants in business park properties, will provide some cashflow support to industrial occupiers.
  • Relief packages announced so far have been provided for, and will help support affected tenants for 0.5-1.5 months.

Overseas diversification a recurring theme

Hospitality REITs: Slower path to recovery

Strong start before a dive in March

  • Hotels were the worst performers in 1Q20. This was in spite of Jan and Feb being strong trading months with occupancies achieved at above 90% across the sector, which led to expectations that the sector’s recovery from its longest-ever RevPAR downcycle was underway.
  • Fundamentals however turned negative in Mar, amid travel restrictions and country-wide lockdowns. As a result, hotel occupancies for the Mar 2020 quarter achieved just 40-45% in Singapore and between 25-45% for properties in Malaysia, Japan, Australia, the UK and Europe.

Government measures buoying occupancies

  • Tourist arrivals fell by a steeper 51-85% y-o-y from Feb-Mar, as Singapore progressively implemented tighter border measures to reduce the risk of Covid-19 importation, including disallowing entry of short-term visitors from all countries from 24 Mar 2020.
  • Demand from long-stay guests helped lift occupancies for serviced residences to 84% for Far East Hospitality Trust (SGX:Q5T). A number of properties were selected to house returning residents serving quarantine and stay home notices since late Mar, as part of government strategies to contain the outbreak, which helped lift occupancies in 1Q. A low number of imported cases and the limited community spread suggests that these support measures are unlikely to be extended into Jun.

An uncertain recovery

  • We expect domestic travel to lead the demand recovery when movement restrictions are lifted, followed by international travel, which could pick up in 4Q, when borders are reopened. In China, where 90% of its hotels have reopened, economy and mid-scale hotels are showing a stronger pick-up ahead of the luxury class, according to industry consultant STR.

Lowering estimates, master lease fixed minimum rents limit downside

Office REITs – Positive reversions into 2020

  • Office REITs reported healthy occupancies and positive double-digit rental reversions in 1Q20. While market rents fell marginally (by 0.4% q-o-q to SGD11.50 psf) after ten quarters of growth, CapitaLand Commercial Trust (SGX:C61U) recorded signing rents 3- 23% higher than its expiring rents, with the strongest rental reversion at CapitaGreen as committed rents ranged from SGD11.00-12.20 psf as compared to average expiring rents of SGD9.41 psf.
  • Leasing activity was buoyant, with low expiries expected into 2020. CapitaLand Commercial Trust finalised leases for 303k sf of space or two-thirds of its leases expiring in 2020, leaving 9% which will mostly expire in 2H20. Keppel REIT (SGX:K71U) signed 171k sf of which 54% were new leases. Suntec REIT (SGX:T82U) leased 134k sf of office space, just over half of its 2020 expiring leases, of which 42% were new leases. Demand was driven by the technology, finance, insurance and real estate sectors.
  • We do not expect the office landlords to provide substantial rental relief or rent deferments to their tenants except for co-working operators, which contribute 2-4% of NLA. Rental reversions are expected to stay positive into 2020 given the low expiring rents in FY20-22.

S-REITs' Mar-20 Quarter Performance

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-05-19
SGX Stock Analyst Report BUY UPGRADE HOLD 1.10 DOWN 1.400