Singapore REITs - CGS-CIMB Research 2021-05-17: Opportunity To Bargain Hunt?

Singapore REITs - CGS-CIMB Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) FRASERS CENTREPOINT TRUST (SGX:J69U)

Singapore REITs - Opportunity To Bargain Hunt?




S-REITs Held Up Well On A Q-o-q Basis

  • Performance of the S-REIT Index, FSTREI, was choppy, with share prices up 0.9% year-to-date, buffeted by rising bond yields and inflation concerns. That said, we note that S-REITs have held up well in Apr-May 2021, with share prices tracking the broader market and delivering a decline of 3.1% (vs. the 2.7% decline in the broader market).
  • Between Mar and May 2021, the spread between the 2-year and 10-year Singapore government bond yields (which we deem as having a high negative correlation to S-REITs price performance) had widened from 100bp to ~120bp. However, S-REITs’ share price performance have remained relatively stable, indicating that the market had priced in these expectations.


S-REITs’ 1QCY21 Results & Update Highlights

  • In 1Q21, the occupancy rate of malls under the retail REITs remained high at > 96% (down by between 0.1% pt and 1% pt q-o-q). Rental reversions were in the negative range in 1Q21 but improved on a q-o-q basis. Generally, downtown malls’ rental reversions declined in the double digits (10% to 20%), while suburban malls were more resilient (single-digit declines). On a y-o-y basis, 1Q2021 tenant sales were showing flat to positive growth, partially due to low base effects as COVID-19 cases spiked in early-2020. Shopper traffic recovery remained slow and capped at 60-70% of pre-COVID-19 levels due to border closures and work-from-home.
  • In 1Q21, office REITs reported higher earnings, due to positive rental reversion (albeit more moderated than previous quarters), contributions from new acquisitions/completed properties and absence of retained income. There was minimal tenant relief or deferments during the quarter. Leasing activity picked up q-o-q. However, there were some slight movements in committed occupancy.
  • Industrial REITs continued to report high portfolio occupancy and positive rental reversions in 1Q21. There was lower tenant relief/deferment provided. Contributions from new acquisitions were another DPU growth driver. While Mapletree Logistics Trust (SGX:M44U) saw higher asset values, particularly for its properties in HK SAR, Japan and South Korea, both Mapletree Logistics Trust and Mapletree Industrial Trust (SGX:ME8U) took haircuts to their Singapore portfolio values.
  • The performance of hospitality REITs in 1Q2021 remained mixed. Singapore operations were largely supported by government contracts, but overseas recovery, especially in Europe and Japan, remained volatile. The REITs reported overall RevPAR/RevPAU y-o-y declines of 20-90% in 1Q2021. Among the overseas countries, Ascott Residence Trust (SGX:HMN)’s China (-9% q-o-q) and Vietnam (-4% q-o-q) RevPAU were relatively stable, supported by recovery in domestic demand and long-stay guests. As for CDL Hospitality Trusts (SGX:J85), Maldives saw a strong 114% y-o-y growth in RevPAR, driven by the operations ramp-up of Raffles Maldives and leisure demand from Eastern Europe. Ascott Residence Trust’s Australian hotels and CDL Hospitality Trusts’s NZ hotels delivered stronger RevPAR y-o-y due to isolation business. UK, Europe and Japan were generally weak for both REITs due to lockdowns in these regions. All REITs remained profitable in 1QFY21, thanks to master leases and cost-saving initiatives.


S-REITs valuations remain stable post-1QCY21 results/updates

  • S-REIT valuations have remained stable, at ~4.65% FY21F yield, which is close to the +1 standard deviation level. In terms of yield spread, it is trading at a 311bp spread to the 10-year government bond yield, which is below the long-term spread of 380bp. This is, in part, due also to earnings still remaining below the pre-COVID-19 level.
  • S-REITs are trading at 1.06x P/BV, which is mid-way between the -1 standard deviation and average valuation band.


S-REITs gearing inched up q-o-q

  • S-REIT sector gearing ticked up q-o-q in 1Q21 to 39.4% as the REITs remain on acquisition paths. The sector has little refinancing risk, with 8% of total sector debt to be refinanced for the remainder of 2021F and another 14% in 2022F.
  • The proportion of fixed rate debt trended down a little q-o-q to 74%, although some REITs like Frasers Logistics & Commercial Trust (SGX:BUOU) have increased their fixed debt ratio.


Overall funding costs remained low

  • S-REITs enjoyed interest cost savings q-o-q, achieving lower average cost of debt in 1Q21 as cost of shorter duration debt remained low.
  • Our sensitivity analysis shows that every 0.1%-pt change in floating debt cost and 0.5%-pt change in refinancing cost for debt due over the next 12-18 months could erode DPUs by a marginal 0-1.6%.
  • We think higher geared S-REITs, especially those with leverage above 40% and those with a greater proportion of floating rate debt, will likely be more impacted by the rising interest rate trend.
  • In addition, S-REITs with greater proportion of debt refinancing over the next 12-18 months may feel the impact of higher debt cost sooner, in our view.


S-REITs continue to adopt active asset management strategy

  • S-REITs continue to be active on the asset management front, with accretive acquisitions, divestments and asset enhancement initiatives.
  • Notable deals announced include Ascendas REIT (SGX:A17U)’s proposed purchase of the balance 75% stake in Galaxis. ESR-REIT (SGX:J91U) also announced a series of acquisitions in Singapore and Australia and asset enhancement initiatives, as well as the divestment of two Singapore properties. Frasers Centrepoint Trust (SGX:J69U) announced the divestment of Yew Tee Point, one of its smaller malls, in tandem with its strategy to prefer larger-scaled malls.
  • Going forward, we anticipate S-REITs to continue to explore inorganic growth opportunities, with ample debt headroom and the still-low funding cost, to drive DPU growth.


Entering into "Phase 2 (heightened alert)"

  • Singapore has entered into a heightened alert phase 2 from 16 May to 13 Jun 2021. According to our report Singapore Strategy - CGS-CIMB Research 2021-05-14: Groundhog Day, among the new measures, WFH is default, while eateries are allowed for only takeaways/delivery. Social gathering size is reduced to two. Other prohibitions include strenuous indoor exercise classes and sports. Wedding receptions are not allowed, but wedding solemnisations are allowed (up to 100 pax, with pre-event testing). Attractions that previously received approval to operate at 50% will be reduced to 25%.
  • The government will provide a 1-month rental waiver for eateries in government-owned premises. Commercial landlords are urged to support F&B outlets during this period. F&B tenants make up 10- 40% of retail REIT’s gross rental income. We estimate every month of rental rebate given by retail landlords to F&B tenants could impact our FY21F DPU forecast by 0.5%-4%.


Retail S-REITs – Tenant sales well supported by domestic spending

  • In 1Q21, the occupancy rate of malls under the REITs remained high at > 96% (declined by between 0.1% pt and 1% pt q-o-q).
  • To maintain malls’ occupancy rates, landlords are now more flexible in leasing terms, but lease structures remain largely unchanged, with short-term leases and gross turnover (GTO) rent structures making up just a small proportion of total rental income.
  • Rental reversions were in the negative range in 1Q21 but improved on a q-o-q basis. Generally, downtown malls rental reversion declined in the double digits (10% to 20%), while suburban malls were more resilient with single-digit declines.
  • Landlords continued to dish out rental rebates but at a minimum amount.
  • Tenant sales were encouraging and have generally recovered close to pre-COVID-19 levels. On a y-o-y basis, 1Q2021 tenant sales were showing flat to positive growth, partially due to the low base effects as COVID-19 cases spiked in early-2020.
  • The performance of tenant sales was in line with an average of 6.4% y-o-y decline in Singapore retail sales index in Jan-Mar 2019 (pre-COVID-19). On a q-o-q basis, retail sales index declined 5.8% on average due to seasonality and strong pent-up demand in 4Q20.
  • Shopper traffic recovery remained slow and capped at 60-70% of pre-COVID-19 levels due to border closures and work-from-home.
  • The new code of conduct that set outs fairer lease negotiations between landlords and retail tenants is expected to have only a minimal low single-digit impact on the REITs’ revenue, based on the REITs’ estimates.

Accumulate Retail S-REITs On Price Weakness

  • Going forward, we believe the leasing environment will remain challenging. While we think that the REITs will be able to maintain high occupancy at the malls, we believe that rental pressure will be inevitable, given the weak trading environment. This is especially so after the recent spike in COVID-19 cases in Singapore and tightening measures (including no dining in and social gatherings capped at two pax from 16 May to 13 Jun) to cope with rising COVID-19 cases. We have factored in full-year rental reversions of -3% to -20% for FY21F in our forecasts.
  • We think sentiments on retail REITs will be weak due to the recent spike in COVID-19 cases. However, we believe landlords, tenants and the government are now better equipped to deal with COVID-19 and, hence, we expect a quicker recovery rebound vs early-2020 when COVID-19 first hit Singapore. Unless substantial rental rebates are given out, we do not expect the tighter measures to have a substantial impact on the REITs’ financials as the impact from rental reversion will be spread out. Retail lease renewals each year usually account for only 10-30% of total income. Based on our analysis, every 0.5 months of rental rebates given out to all tenants will reduce our FY21F DPU by between 2% and 5%.
  • We believe any share price weakness is an opportunity to accumulate. Our top pick remains Frasers Centrepoint Trust (SGX:J69U), which has pure exposure to suburban malls and should recover faster than its peers. We believe the recent tightening measures will have a larger impact on downtown malls. SPH REIT (SGX:SK6U) and Lendlease REIT (SGX:JYEU) have the largest exposures to downtown malls at ~60-70% of total 1HFY21F revenue. The other REITs (excluding Frasers Centrepoint Trust) have 30- 35% revenue exposure to downtown malls.


Office S-REITs – Near-term outlook underpinned by positive reversions, although moderating

  • Office rent reversions were mixed in 1Q21, with Keppel REIT (SGX:K71U) achieving a positive rental reversion of 10.7%, while Suntec REIT (SGX:T82U) reported a relatively flat - 0.9% reversion due to the timing of lease renewals. CapitaLand Integrated Commercial Trust (SGX:C38U) saw some negative reversions due to tenant downsizing. Occupancy showed frictional movement q-o-q, with Keppel REIT’s committed portfolio occupancy at 96.5%. According to the office REITs, demand for office space in 1Q came mainly from renewals and technology and banking and financial services sectors.
  • Based on URA data, office rents rose 3.3% q-o-q in 1Q21 (compared with -3.5% q-o-q in 4Q20 and -8.5% for the whole of 2020). That said, net absorption continue to be negative, with 204k sq ft of net space given up in 1Q. Vacancy stood at 11.9% at end-1Q21.
  • We maintain our expectation for spot rents to decline by up to 5% in 2021F, likely to be front-loaded. We anticipate office REITs to achieve flat-to-slightly-higher rental reversions in 2021F.
  • The Singapore government announced that, between 16 May and 13 June, WFH will be the default and employers are to ensure that those able to WFH do so. In addition to no social gatherings at work, flexible working hours and staggered start times are also to be implemented, while there should be no cross-deployment of workers to multiple worksites. This would likely impact physical occupancy in office buildings. In the longer run, as employer adopt a more hybrid way of working, we think office occupancy may face some volatility as tenants reassess their new office core/flex workspace requirements. Potential upside risks to office rents include delayed new supply and demand from Chinese tech companies.


Industrial S-REITs – Benefitting from economic recovery

  • Industrial REITs continued to demonstrate their stability, with generally positive rental reversions and high occupancy across their geographic footprint, as well as new contributions from new acquisitions. Mapletree Logistics Trust saw a positive rental reversion of 0.8%, while Mapletree Industrial Trust’s rental reversion was down 3%. Mapletree Industrial Trust’s management guided that reversions may be challenged for the new couple of quarters, but the worst is likely over. Ascendas REIT continued to enjoy positive reversions, although there was a slight movement in portfolio occupancy as two of its Singapore buildings are slated for redevelopment.
  • In 1Q21, overall occupancy for the industrial property market rose 0.1% pt q-o-q to 90%. Meanwhile, price and rental for overall industrial space picked up by 0.9% and 0.6%, respectively, q-o-q. As at end-1Q21, there was potential supply of 5.2m sq m of industrial gross floor area (GFA) scheduled to be completed between 2021F and 2025F.
  • We expect declines of 1-3% in industrial rents (for warehouse space) and 3-5% in factory spaces in 2021F. We expect data centres and hi-spec industrial spaces to be more resilient during the same period.


Hospitality S-REITs – Mixed bag in 1Q21; improvements seen on a q-o-q basis

  • The performance of hospitality REITs in 1Q2021 remained mixed. Singapore operations were largely supported by government contracts, but overseas recovery, especially in Europe and Japan, remained volatile.
  • The REITs reported overall RevPAR/RevPAU y-o-y declines of 20-90% in 1Q2021. While q-o-q RevPAR/RevPAU continued to be weak, there were pockets of positive growth from certain countries, supported by alternative businesses and borders reopening, such as in the Maldives.
  • CDL Hospitality Trusts (SGX:J85) and Far East Hospitality Trust (SGX:Q5T), which have higher exposures to Singapore, reported relatively high occupancy rates for their Singapore hotels at 70-80% in 1QFY21, supported mainly by government contracts. However, this was offset by the low average room rates of S$70-100 per night (c.- 50% y-o-y), leading to a y-o-y decline of 30-50% in Singapore RevPAU (-14% to -25% q-o-q). Ascott Residence Trust (SGX:HMN)’s overall occupancy (Singapore and overseas) was at 50% in 1QFY21, with Singapore reporting a RevPAU decline of 42% y-o-y. Far East Hospitality Trust’s serviced residence in Singapore saw more resilient performance with a 4.8% RevPAU decline q-o-q, supported by long-stay guests.
  • Among the overseas countries, Ascott Residence Trust’s China (-9% q-o-q) and Vietnam (-4% q-o-q) were relatively stable, supported by recovery in domestic demand and long-stay guests. As for CDL Hospitality Trusts, Maldives saw strong 114% y-o-y growth in RevPAR, driven by the operations ramp-up of Raffles Maldives and leisure demand from Eastern Europe. Ascott Residence Trust’s Australian hotels and CDL Hospitality Trusts’s NZ hotels delivered stronger RevPAR y-o-y due to isolation business. UK, Europe and Japan were generally weak for both REITs due to lockdowns in these regions.
  • All REITs remained profitable in 1QFY21, thanks to master leases and cost-saving initiatives.

Position Early For Recovery Of Hospitality S-REITs

  • With the recent resurgence in COVID-19 cases, the reopening of international borders remains uncertain. We expect domestic demand to pick up first before international travel resumes in a big way. Hence, we favour REITs with exposures to countries with strong domestic demand and fast inoculation rates or low COVID-19 cases. We have assumed a pick-up in travel activities towards end-2021F and a full recovery in 2023F/2024F.
  • Ascott Residence Trust has no master lease expiring in 2021, but has 17% of its 2020 master lease GRI expiring in 2022. As these leases are with its sponsor, we believe they would be renewed, although leasing terms could be different. CDL Hospitality Trusts’s Australia master lease expired in Apr 2021, and it has no more lease expiries for the rest of 2021. It has 23.6% of its 2020 master lease GRI expiring in 2022 from Grand Millennium Auckland, which is now used as an isolation business facility. Far East Hospitality Trust does not have any master lease expiry until 2032.
  • We reiterate ADD on Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust. We understand that there is a strong desire to travel, although demand is affected whenever there is a lockdown. Both leisure demand and queries from corporates have also picked up recently, although the booking window remains narrow. The stocks are trading below book and offer DPU yields of ~4% in FY21, with scope for more if the REITs distribute more capital.
  • Ascott Residence Trust (ADD, target price S$1.43) is our top pick as we believe that it would see a faster RevPAR recovery than its peers. Ascott Residence Trust has the largest exposure to countries with strong domestic demand and high inoculation rates and/or low COVID-19 cases (56% of AUM).

S-REIT sector strategy

  • We remain Overweight on S-REITs on positive fundamentals, as the sector resumes its operating earnings recovery and ability to continue to deliver acquisition growth.
  • As Singapore enters into heightened alert Phase 2 due to rising community COVID-19 cases, we believe sentiments on re-opening plays, such as retail and tourism, may be dampened in the near term. However, we anticipate sub-sectors such as industrials may continue to hold up well.
  • Our top buys are Ascendas REIT (SGX:A17U), Frasers Logistics & Commercial Trust (SGX:BUOU) and Frasers Centrepoint Trust (SGX:J69U).
  • Downside risks to our view include sharper-than-projected interest rate hikes and slower-than-expected global economic recovery.
  • See the 24-page report attached below for complete analysis.
  • See also SGX market update: Recent S-REIT Performances, Yields & DPU Growth.





LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-17
SGX Stock Analyst Report ADD MAINTAIN ADD 3.310 SAME 3.310
ADD MAINTAIN ADD 1.570 SAME 1.570
ADD MAINTAIN ADD 2.870 SAME 2.870



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