Analysts at Maybank Kim Eng, OCBC Investment Research and UOB Kay Hian are positive on the Singapore REITs (S-REITs) under their coverage.
While OCBC analyst Chu Peng has not given an overall recommendation for the sector, Maybank Kim Eng analyst Chua Su Tye has maintained “positive” on S-REITs. UOB Kay Hian analyst Jonathan Koh has, too, kept “overweight” on the sector.
“The recently concluded 2Q/1HFY2021 earnings season has given us room for some optimism, but also reflects the uneven road to recovery ahead given overall uncertainties over the Covid-19 situation and macroeconomic landscape,” writes OCBC’s Chu in an Aug 19 report.
Of the 15 S-REITs under OCBC’s coverage, one exceeded the brokerage’s expectations, nine met expectations, while five fell short.
On a y-o-y aggregate basis, the 15 S-REITs logged a 23.3% growth, although Chu says it is largely attributed to the low-base effects from 2020, during the peak of the pandemic.
Following the latest set of results and considering the outlook ahead, Chu is now estimating that the 15 S-REITs will record a market-cap-weighted distribution per unit (DPU) growth of 14.0% for the current FY (FY2021/FY2022, depending on the REITs’ individual financial year ends).
“Y-o-y growth in 2HFY2021 is likely to see some normalisation as low base effects wane off,” she says. “Looking at the next financial year (FY2022/FY2023) when conditions are expected to be more normalised, we are forecasting DPU growth of 7.8%.”
“In terms of valuation, the forward yield spread between the FTSE ST REIT Index (FSTREI) and the 10-year Singapore government bond yield now stands at 382 basis points (bps). While this is higher than the y-t-d low of 346 bps, it is 0.6 standard deviations (s.d.) below the 10-year average of 420 bps,” she adds.
Given the current progress of global vaccination rates, Chu recommends investors have a portfolio of plays for the reopening and economic recovery.
See also: RHB stays ‘overweight’ on S-REITs with Suntec, AIMS APAC and Prime US as top picks
These, she says, comprise mainly retail and hospitality REITs including Ascott Residence Trust (ART), CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT) and Mapletree North Asia Commercial Trust (MNACT).
Chu has given these four REITs “buy” calls with target prices of $1.21, $2.53, $2.78 and $1.15 respectively.
She adds that the portfolio should be balanced with REITs that are more resilient and defensive with income streams that are less likely to be affected by lockdowns.
These include names like Ascendas REIT (A-REIT) and Mapletree Industrial Trust (MINT). Again, Chu has given both “buy” calls with target prices of $3.83 and $3.41 respectively.
That said, Chu has identified potential downsides to her projections, which could come in the form of a resurgence in new Covid-19 cases worldwide, which would impact the global economic recovery.
The way Maybank Kim Eng’s Chua sees it, S-REITs are now making headway into the new economy.
“S-REITs have lagged the market’s y-t-d recovery despite improving fundamentals. The sector now trades at 290bps above the SG 10-year, and offers c.9% DPU compound annual growth rate (CAGR) from FY2020 to FY2022,” he writes in an Aug 18 report.
To him, A-REIT, CICT, Mapletree Commercial Trust (MCT), MINT and Frasers Centrepoint Trust (FCT) remain his top buys. He has given these REITs “buy” calls with target prices of $3.65, $2.55, $2.35, $3.35 and $2.90 respectively.
Sub-sector-wise, Chua prefers industrial REITs for their “resilient DPUs, stronger assets under management (AUM) profiles and multiple catalysts”.
“We expect acquisitions to gain traction, as the industrial REITs move past resilient DPUs in 1HFY2021, and grow their business park, data centre and logistics AUMs,” Chua writes. “Redevelopment opportunities have arisen amid tightening cap rates, and we estimate [around] 6-7% yield-on-cost for A-REIT on its proposed 1 Science Park Drive project.”
“ESR Cayman’s proposed acquisition of ARA to gain scale in new economy AUM could spur interest in related small-cap REIT names given their overlapping asset portfolios and room to lower average financing costs at 3.1% vs 2.1% for their large-cap peers,” he adds.
On office REITs, Chua also sees upsides to the sub-sector as they now offer a better risk-reward from the pullback amid recovering Grade A office rents, “further overseas diversification, and Singapore’s clearer reopening pace”.
“The push into new economy and longer weighted average lease expiry (WALE) AUMs will underpin DPU visibility, while sound balance sheets and low interest rates should support acquisition growth upside,” he explains.
In his report, Chua adds that demand is “turning a corner” for the office REIT sub-sector, which offers a cyclical opportunity as staff return to their offices.
“Grade A office rents will likely be flat this year, against our initial -5% estimate,” he writes.
Keppel REIT, in particular, has pulled back following Keppel Corporation’s proposed privatisation of Singapore Press Holdings (SPH), which means valuations for the REIT are now “undemanding” at 5-6% dividend yield, 15-35% below book and against 3.25-3.75% cap rates.
The hospitality REIT sub-sector remains in “slow transition”, with low visibility for revenues per average room (RevPAR).
“Occupancies at 60-78% across the [hospitality] REIT portfolios are artificially supported by government isolation demand and should ease in 4QFY2021, while RevPAR recovery remains slow into 2022,” says Chua.
He recommends looking to hospitality REITs that has long-stay rental housing and purpose-build student accommodation (PBSA) assets in their portfolios. These, he says, will “figure more significantly in AUMs”.
On this, ART remains “best placed on execution”, given its diversified portfolio, strong balance sheet and over $300 million in residual divestment gains to support capital distributions.
In addition to his “overweight” recommendation, UOB Kay Hian analyst Koh has given “overweight” calls for all the S-REIT sub-sectors, with the exception of hospitality REITs at “marketweight”.
In his report dated Aug 19, Koh says he recommends a “balanced mix” of New Economy and reopening plays.
A-REIT, Frasers Logistics & Commercial Trust (FLCT) and MINT are categorised under New Economy plays, while FCT, Far East Hospitality Trust (FEHT), Lendlease Global Commercial REIT (LREIT) and United Hampshire US REIT are classed under reopening plays.
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Koh has pegged all seven S-REITs at “buy” with target prices of $3.83 (A-REIT), $3.06 (FCT), $1.79 (FLCT), 71 cents (FEHT), $1.01 (LREIT), $3.63 (MINT) and 95 US cents (United Hampshire US REIT).
Under the UOBKH S-REIT Index, which fell 1.8% in the past two weeks, the top outperformer was ESR-REIT, which gained 3.7% after completing its first overseas acquisition of a 10% interest in ESR Australia Logistics Partnership.
ARA US Hospitality Trust fell by 7.4% as it did not declare any DPU for 1HFY2021 as recovery is in the early stages.
The Straits Times Index (STI) closed 15.78 points higher or 0.51% up at 3,102.75 on Aug 20.