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S-REIT DPUs expected to grow 12% y-o-y in FY2022; office REITs preferred: Maybank Securities

Felicia Tan
Felicia Tan3/12/2022 12:49 AM GMT+08  • 3 min read
S-REIT DPUs expected to grow 12% y-o-y in FY2022; office REITs preferred: Maybank Securities
Maybank has also upgraded Suntec REIT to “buy” with a TP of $1.80 based on its leverage to Singapore’s reopening.
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Maybank Securities analyst Chua Su Tye is remaining “positive” on the Singapore REITs (S-REITs) sector, as he sees evidence of a broad-based recovery in FY2022.

According to Chua, the buoyant outlook is based on the REITs being underpinned by resilient occupancies and improving leasing momentum.

“We see the earnings outlook strengthening amid firmer macro fundamentals and re-opening efforts,” he writes in his report dated March 3.

On this, Chua expects distributions per unit (DPU) amongst the sector to increase by 12% y-o-y in FY2022 on the back of the absence of rental waivers, rising rents from the normalisation of businesses, as well as contributions from acquisitions.

To him, the sector remains “under-owned, in our view, as risks of higher interest rates have kept investors on the sidelines”.

“S-REITs have underperformed and are now 7% below November 2021 peaks, but with short-term bond yields rising in anticipation of rate hikes, we see lower risk of further yield curve steepening ahead,” says Chua.

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“With the sector yield spread of 3.7% 1 standard deviation above their five-year historical average, we think higher rates are largely priced in,” he adds. “The interest rate outlook remains a key risk, but we see DPUs cushioned by strong balance sheets, while our sensitivities suggest limited downside to estimates and target prices.”

Office REITs and large-cap industrial names preferred

Amongst the REITs, Chua prefers office REITs and large-cap industrial names with an exposure to the new economy.

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“The office sector saw a short-lived downcycle and is recovering on stronger-than-expected demand, led by tech occupier expansion, a ‘flight-to-quality’ and an easing of work-from-home mandates,” writes Chua.

“With supply constrained, pricing power has returned to office landlords. We forecast rents to rise 12% through 2023 and see a more active physical market and increasing inorganic growth opportunities for REITs, especially as cost of capital improves,” he adds.

Within the office sub-sector, Chua has lifted his DPU estimates for Keppel REIT and Suntec REIT by 2%-3% with higher target prices of 14%-16% “on stronger rental growth for Singapore office assets, and lower cost of equity assumptions”.

Chua is also remaining upbeat on the industrial sub-sector due to the rising contributions from the REITs’ overseas properties, as well as growth in assets under management (AUM) that is underpinned by the concentration in new economy segments.

“Having scaled up acquisitions, industrial REITs remain well-placed to capitalise on compressing cap rates and rising asset values. We expect to see acceleration of recycling plans supplementing inorganic growth initiatives,” says Chua, who adds that he sees catalysts from accretive acquisitions, and strengthening rents, led by logistics, and business park space.

Top picks

Amongst the REITs, Chua has identified his top picks as being Ascendas REIT (A-REIT), CapitaLand Integrated Commercial Trust (CICT), Mapletree Industrial Trust (MINT) and Suntec REIT.

For more stories about where money flows, click here for Capital Section

According to him, these names are expected to deliver higher total return potential with a dividend yield range of 5.5%-6.0%, and a DPU compound annual growth rate (CAGR) of 4.5%-5.5%.

Chua has upgraded his recommendation on Suntec REIT to “buy” from “hold” with a target price of $1.80 based on its leverage to Singapore’s reopening. He has also given A-REIT, CICT and MINT “buy” calls with target prices of $3.65, $2.55 and $3.35 respectively.

Chua has rated Keppel REIT at “hold” with a target price of $1.20.

Units in A-REIT, CICT and MINT closed at $2.87, $2.16 and $2.63 respectively on March 11. Units in Suntec REIT and Keppel REIT closed $1.69 and $1.20 respectively on the same day.

Photo: Bloomberg

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