Singapore REITs - UOB Kay Hian 2022-07-01: Strength Of Balance Sheet Being Stressed & Tested

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ASCOTT RESIDENCE TRUST (SGX:HMN) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U) FRASERS CENTREPOINT TRUST (SGX:J69U) LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU) CAPITALAND INTEGRATED COMM TR (SGX:C38U) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) ELITE COMMERCIAL REIT (SGX:MXNU) KEPPEL PACIFIC OAK US REIT (SGX:CMOU) MANULIFE US REIT (SGX:BTOU) UNITED HAMPSHIRE US REIT (SGX:ODBU) DIGITAL CORE REIT (SGX:DCRU)

Singapore REITs - Strength Of Balance Sheet Being Stressed & Tested

• The rapid surge in interest rates affects Singapore REITs (S-REITs) who have not adequately hedged their cost of borrowings.
• We cut Digital Core REIT (SGX:DCRU)’s 2023 DPU by 15% but upgrade the S-REIT to BUY after the recent 35% sell-off.
• Mapletree Logistics Trust (SGX:M44U) has only 11% of its borrowings exposed to rising interest rates.
• Stay invested in hospitality, retail and office REITs as reopening plays. BUY
  • Ascott Residence Trust (SGX:HMN) (Target: S$1.31),
  • Frasers Centrepoint Trust (SGX:J69U) (Target: S$2.74),
  • Far East Hospitality Trust (SGX:Q5T) (Target: S$0.77) and
  • Lendlease REIT (SGX:JYEU) (Target: S$0.95).
• Maintain OVERWEIGHT on Singapore REITs.

The Fed’s renewed fervour to clamp down on inflation.

• The Fed has accelerated the tempo of interest rate hikes to quell inflationary pressures. It hiked the Fed Funds Rate by a massive 75bp to 1.50% after the FOMC meeting on 15 Jun 22.
• Based on the Fed’s dot plot, the median projected path for Fed Funds Rate would hit 3.4% by end-22 and 3.8% by end-23. The forecast translates to four hikes totalling 200bp in 2H22, and we expect another 75bp hike on 27 July.
• The rate hikes are front-loaded in 2022 and the intensity of rate hikes could ease after the FOMC meeting on 21 Sep 22.

Interest rates in Singapore have moved up accordingly.

• Higher inflation and the Fed’s intervention have caused short-term interest rates to surge. The US yield curve has flattened, indicating a slowdown in economic growth. Fortunately, the 10-year – 2-year term spread has stayed marginally positive at 0.1%. The current short-end of the yield curve implies forward short-term interest rates at 2.7% for one year, 3.4% for two years and 3.4% for three years.
• 3-month SIBOR and 3-month compounded SORA have rose 147bp and 57bp respectively to 1.91% and 0.76% in 1H22. UOB Global Economics & Markets Research forecasts 3-month SIBOR and three-month compounded SORA to reach 2.75% (+2.31ppt y-o-y) and 2.29% (+2.10ppt y-o-y) respectively by end-22.

Maintain OVERWEIGHT on Singapore REITs.

• S-REITs are not out of the woods yet but the gradual easing of inflationary pressure provides some respite. Real estate is a hedge against inflationary pressure, which could potentially push rents higher.
• Downside for the S-REITs sector is limited to 13.6% if distribution yield spikes to 2x standard deviation above long-term mean.

The good, the bad and the ugly.

• Sasseur REIT (SGX:CRPU) has the most conservative aggregate leverage of 26.2%. Conversely, Suntec REIT (SGX:T82U) and Manulife US REIT (SGX:BTOU) are more highly geared with aggregate leverage of 43.3% and 42.8% respectively.
• Lendlease REIT (SGX:JYEU) hedges 90% of its borrowings on fixed rates.
• CapitaLand Integrated Commercial Trust (SGX:C38U), Keppel Pacific Oak US REIT (SGX:CMOU) and Manulife US REIT (SGX:BTOU) also have a high proportion of borrowings on fixed rates of 85%, 84.2% and 86.5% respectively.
• Digital Core REIT (SGX:DCRU) and Suntec REIT (SGX:T82U) hedge a lower 50% and 51% of their borrowings to fixed rates.

Impact of higher interest rates to Singapore REITs' distribution.

• We now expect US Fed Funds Rate to hit 3.25% by end-22 (previous: 2.5%). We have factored in the negative impact on DPU from the accelerated hikes in interest rates around the globe based on forecasts by UOB Global Economics & Markets Research.
• On average, we have adjusted 2023 DPU forecast lower by 2.1% for 20 S-REITs under our coverage. See details in the PDF report attached below.

Digital Core REIT (SGX:DCRU) - Upgrade to BUY

• Digital Core REIT (SGX:DCRU) has maintained the proportion of borrowings hedged to fixed rates at 50%, which means the remaining half of its borrowings are exposed to higher US interest rates.
• We expect its cost of debts to increase from the current 2.1% to 3.6% in 2023 assuming US Fed Funds Rate hit 3.25% by end-22. Capitalisation rates for data centres have remained compressed and unchanged at about 4% for developed markets. Thus, we did not factor in any positive impact from the acquisition of data centres.
• The cut for 2023 DPU forecast is severe at 15% but Digital Core REIT's share price has already fallen by 35% from the peak of US$1.20 in Jan 22 to the current US$0.77. Digital Core REIT's distribution yield of 5.2% for 2023 is attractive due to its sponsor Digital Realty’s pedigree as the largest data centre operator in the world and the more limited future supply of data centres.
• Upgrade Digital Core REIT to BUY. Our target price for Digital Core REIT of US$0.98 is based on DDM (cost of equity: 6.75%, terminal growth: 2.8%).
• See
  • Digital Core REIT's Share Price,
  • Digital Core REIT's Target Price,
  • Digital Core REIT's Analyst Reports,
  • Digital Core REIT's Dividend History,
  • Digital Core REIT's Announcements,
  • Digital Core REIT's Latest News.

Mapletree Logistics Trust (SGX:M44U) - Maintain BUY

• Mapletree Logistics Trust (SGX:M44U) has conservatively hedged 79% of its borrowings to fixed rates. 10% of its borrowings are unhedged yen-denominated borrowings but JPY Policy Rate is expected to remain unchanged at -0.1%. This means that only 11% of its borrowings are exposed to rising interest rates (Singapore dollar: 5% and others (US$, AUD, CNH and INR): 6%).
• Mapletree Logistics Trust has switched emphasis from acquisition to redevelopment projects. It has embarked on the redevelopment of 51 Benoi Road into a six-storey ramp-up logistics property with GFA of 865,000sf. It plans to amalgamate and redevelop two newly-acquired parcels of leasehold industrial properties and its existing Subang 3 and 4 properties at Subang Jaya, Selangor into a six-storey ramp-up logistics megahub with GFA of 1.4m sf.
• Maintain BUY. Our target price of S$2.08 for Mapletree Logistics Trust is based on Dividend Discount Model (cost of equity: 7.0%, terminal growth: 2.8%).
• See
  • Mapletree Logistics Trust's Share Price,
  • Mapletree Logistics Trust's Target Price,
  • Mapletree Logistics Trust's Analyst Reports,
  • Mapletree Logistics Trust's Dividend History,
  • Mapletree Logistics Trust's Announcements,
  • Mapletree Logistics Trust's Latest News.

Singapore REIT Sector Catalysts

• Hospitality, retail and office REITs benefitting from the reopening of the economy.
• Limited new supply for the office, logistics and retail segments in 2022.

Singapore REIT Sector Risk

• Escalation of the Russia-Ukraine war beyond Ukraine.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-07-01

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