Singapore Industrial S-REITs - DBS Research 2021-03-15: A Buyer On Recent Dips


Singapore Industrial S-REITs - A Buyer On Recent Dips

  • Good opportunity to accumulate large cap Industrial S-REITs as recent correction of ~18% is close to 21% peak-to-trough drop in 2013 led by taper tantrum.
  • Misconception of “lack of growth”; Industrial S-REITs to deliver acquisition-led 7% y-o-y growth in FY21F DPU, 2.5% above pre-pandemic level.
  • Well plugged into future structural trends with significant exposure in “new economy” assets.
  • We are buyers on dips given Ascendas REIT (SGX:A17U) and Frasers Logistics & Commercial Trust (SGX:BUOU) offer good value with yield spreads of ~4.1%, wider than pre-pandemic levels. We also like Mapletree Logistics Trust (SGX:M44U) for its Asia Pacific footprint and pivot into the Indian logistics space.

10-year yields have spiked recently on inflation fears.

  • Investors are justifiably nervous given the recent correction in S-REITs share prices as market focus turned to inflation fears driving a sharp spike in 10-year yields in recent weeks. Expectations of higher inflation have brought US 10-year yields higher to 1.5%, representing 85bps rise over 3 months since the bottom in Nov 2020.
  • This had also pulled the SG 10-year yield by close to 75bps to ~1.55% (10 March 2021) over the same period. We however note that most of the spike in the 10-year yields happened in Feb 2021 (55 bps points for the US 10-year yield and ~40 bps points for SG 10-year yield).
  • Generally, we have seen S-REITs underperform the STI when the 10-year yield spikes up rather than a gradual rise as the latter represents steady economic recovery which would drive rentals and occupancy rates. With most the spike in yields largely done (according to our interest rate strategists), we believe that a period of share price stability will return.

Large cap industrial S-REITs have underperformed year-to-date.

  • S-REITs started the year brightly in 2021 but performance reversed in Feb and early Mar with the spike in the 10-year yields, and S-REITs share prices have declined by ~4% year-to-date or ~9% from the peak in Jan 2021. The large cap industrial S-REITs have come under pressure of late, with Ascendas REIT (SGX:A17U), Mapletree Industrial Trust (SGX:ME8U), Mapletree Logistics Trust (SGX:M44U), Frasers Logistics & Commercial Trust (SGX:BUOU) and Keppel DC REIT (SGX:AJBU) underperforming the broad index (FSTREI), down 18% from the recent peak (vs 8% decline in the FSTREI) as of 10 March 2021.
  • The share price drop in the industrial subsector is largely expected given the ongoing rotational interest to the cyclical subsectors (i.e. retail, office and hospitality) in recent times. At current levels, we believe the correction for the larger cap S-REITs is largely done, especially when the price decline (peak-to-trough) closely mirrors that seen during the 2013 taper tantrums.

Time to buy the dip.

  • When compared against the peak-to-trough performance of the top 10 S-REITs back in 2013, we note that industrial S-REITs have now dropped close to the ~21% fall that we saw in 2013. We thus see value and would take the opportunity to re-enter selected industrial S-REITs. Large cap industrial S-REITs are poised to deliver ~7% y-o-y growth in DPU in FY21 on the back of earnings recovery and acquisitions.

Well positioned for the future

Yields reflect the industrial S-REIT pivot to “new economy” assets.

  • From a yield perspective, the recent correction has brought yields for the large cap industrial S-REITs to ~4.9% on average (ranging ~3.8% to 5.6%), which is at its 2-year average and close to pre-pandemic levels. The exception is Ascendas REIT which currently trades at ~5.6% forward yield, highest when compared to the past few years and close to yields in the taper tantrum days in 2013.
  • From a yield spread perspective (yields compared to the 10-year SG yields), the sector is already trading at its pre-pandemic valuation levels with Ascendas REIT a standout at 4.1% (vs 3.3% in pre-pandemic FY19 and 4.0% in taper tantrum days).
  • Despite the tighter spreads for the other industrial S-REITs, we believe that investors are ignoring the large cap industrial S-REITs strong DPU growth of ~7.0% in FY21 and pivot towards the more specialized industrial real estate class (or new economy assets), which should accelerate their growth prospects with lower earnings risk. As such, we see ample buffers.
  • Catalysts that would bring flows back to the S-REITs are
    1. stability in the 10-year yields, and
    2. increased confidence on their earnings growth trajectory (by 1Q21 in our view) and acquisitions.
  • Our strategy is to take advantage of the correction to accumulate, as per our earlier report: Singapore REITs - DBS Research 2021-02-19: Rising 10-Year Yields A Bane For S-REITs; Beating The Odds.

Positioned to capture future growth prospects

  • The 5 large cap industrial REITs (Ascendas REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, Frasers Logistics & Commercial Trust and Keppel DC REIT)’s asset under management (AUM) have grown by almost 3x in size and expanded outside of Singapore in order to bring diversity and growth to unitholders. The REITs (through mandates) have now pivoted towards more specialised industrial assets (i.e. business parks/suburban offices or logistics and data-centers) which have more resilient demand and expected to continue growing in a post COVID-19 world.
  • As a percentage of assets, the large cap industrial S-REITs have close to 77% in the above mentioned “new-economy” asset classes compared to ~60% back in 2013. This significant shift should offer investors comfort that earnings and DPU are on a growth track.

Ability to deliver pre-pandemic DPUs this year is not priced in

Industrial S-REITs ability to deliver pre-pandemic DPU not priced in.

  • The DPU growth for the industrial subsector is projected to grow at ~7% in FY21, but this is lower compared other subsectors which range between +3.0% to +43%. That said, the lower growth rate is due to limited income disruption seen in FY20.
  • Recall that due to the circuit breaker in Singapore in Apr-May 2020, and mandatory shutdowns across the globe, landlords in general had to provide rental incentives to tenants. Retail landlords were impacted the most with industrial and office landlords seeing lesser impact as their tenants remained in operation.
  • Among the industrial S-REITs, we estimate that DPUs of industrial large cap S-REITs is projected to grow by an average of ~7% y-o-y in FY21, and projected to deliver ~2.5% higher DPU on average than pre-pandemic DPU (FY19).

Ability to acquire is a key catalyst

Not resting on their laurels.

  • Scanning the global landscape for opportunities, either through third parties or from their respective sponsors, is one of the key reasons why the industrial S-REITs, especially large cap REITs, are able to grow through acquisitions.
  • Even after the recent share price correction, the 5 large cap industrial S-REITs continue to remain within the virtuous cycle of growth where the implied WACC is lower than their target yields of potential acquisitions that the managers might be looking at.

Significant pipelines to tap on.

Derek TAN DBS Group Research | Dale LAI DBS Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2021-03-15
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