SGX Stocks and Warrants

Author: kimeng   |   Latest post: Mon, 17 Jun 2019, 12:36 PM


Singapore REITs: Increase Defensiveness Among Defensives

Author:   |    Publish date:

  • Weaker outlook for hospitality REITs
  • Seek more defensive shelter
  • Switch to FCT, FLT, KDCREIT and MAGIC

Tempering Our Expectations for Hospitality REITs

We have pushed back our expectations for a pick-up in Singapore hotels’ RevPAR from this year to early 2019, following the latest set of results. 2Q18 hotel RevPAR growth came in at -0.5% YoY for OUE Hospitality Trust (OUEHT) and -0.9% YoY for CDL Hospitality Trusts (CDLHT).

Management feedback regarding the 2Q performance highlighted

  1. ongoing competition from 4Q17’s new room supply,
  2. the Trump-Kim summit which disrupted corporate plans and affected the visa issuance of corporate travellers/tour groups and
  3. two public holidays that fell mid-week.

Beyond the one-off occurrences mentioned above, we are wary that the ongoing ramp-up at the new hotels will continue to interfere with attempts to increase Average Daily Rates (ADRs) for longer than expected. Compared to its peers,

Far East Hospitality Trust (FEHT) posted a surprisingly strong 6.9% RevPAR increase on the back of better occupancy as well as higher ADRs. Within the hospitality sub-sector, we favour FEHT the most given that it stands to benefit from the low base effect of poor operational results in FY17.

Hospitality: Looking at Relatively Muted DPU Growth for 2H18?

There are other REIT-specific reasons to expect more muted DPU growth from hospitality REITs under our coverage. For instance, OUEHT faces a high 2H17 RevPAR base to surpass and a lack of income support for its Crowne Plaza Changi Airport. We also expect CDLHT’s New Zealand and Maldives assets to be a drag in 2H18.

On the other hand, Ascott Residence Trust’s portfolio’s wide geographic diversification makes it less volatile operation-wise, both in terms of upside and downside. Given this relatively muted DPU growth outlook for 2H18 as well as the rising interest rate environment, we find this subsector less attractive than before in terms of valuations.

Switch to More Defensive Names

As such, we have downgraded a number of the hospitality REITs under our coverage during this earnings season. We recommend investors to seek more defensive shelter in their investment approach towards the REITs sector. We believe REITs with strong balance sheets, long WALEs and/or exposure to more resilient sectors such as suburban retail would fit in our selection criteria. Investors holding hospitality REITs can consider switching into Frasers Centrepoint Trust (FCT) [BUY; FV: S$2.49]; Frasers Logistics & Industrial Trust (FLT) [BUY; FV: S$1.21]; Keppel DC REIT (KDCREIT) [BUY; FV: S$1.54] and Mapletree North Asia Commercial Trust (MAGIC) [BUY; FV: S$1.42].

FCT’s DPU growth has been buffered by its larger malls, while aggregate leverage is healthy at 29.3%. For FLT, while risks from further depreciation of the AUD against SGD may affect its FY19 DPU, we had already lowered our AUDSGD assumptions previously. WALE is healthy at 6.75 years (as at 31 Mar 2018); the addition of a portfolio of 21 assets from key logistics markets Germany and the Netherlands provides diversification to FLT’s income streams.

KDCREIT has one of the longest WALE in the S-REITs universe, at 8.8 years. Its aggregate leverage of 31.7% also leaves ample debt headroom to fund inorganic growth ahead. MAGIC derives 64% of its FY19F NPI from Festival Walk, which has proven to be resilient over the years, even during the last Global Financial Crisis.

Overall, we maintain NEUTRAL on the S-REITs sector.

Source: OCBC Research - 31 Jul 2018

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