• Hospitality REITs missed expectations
• Retail rent reversions still largely solid
• FCT, FCOT and Starhill REIT our top picks

1QCY15 earnings season review

All 22 S-REITs under OIR’s coverage have announced their 1QCY15 results. The clear underperformer came from the hospitality subsector, whereby all four hospitality REITs under coverage missed our expectations. Another miss came from Suntec REIT, as DPU was flat despite a 12.9% YoY growth in gross revenue. The only outperformer was Mapletree Greater China Commercial Trust, which delivered robust YoY DPU growth of 9.8% due to betterthan-expected rental reversions achieved.

The remaining 16 REITs we cover met our expectations, with strong results coming from Lippo Malls Indonesia Retail Trust (DPU +16.2% YoY), Frasers Commercial Trust (DPU +16.1% YoY), Fortune REIT (DPU +12% YoY) and CapitaLand Retail China Trust (DPU +10% YoY). Overall, there were four REITs under our coverage which registered lower DPU on a YoY basis (three from hospitality subsector), versus just one during the 4QCY14 reporting period.

RevPAR remains lacklustre for Singapore Hotels

The poor performance of Singapore’s hospitality industry was attributed to a number of reasons. These include the absence of biennial events such as the Singapore Airshow, sluggish corporate demand and lacklustre tourist arrivals, especially Indonesians, whom typically put up at hotels in Orchard Road. Although occupancy rates for hospitality REITs were largely stable, RevPAR/RevPAU declines (for Singapore assets) ranged from 3.9%-11.0% YoY, which we believe implies hospitality players have aggressively lowered prices and offered more promotions in order to boost their market share.

Retail REITs remain resilient

Despite stifling issues such as manpower shortages and soft tourism figures, Singaporefocused retail REITs remained resilient, registering positive rental reversions and largely stable or slightly lower occupancy rates. Rental uplifts ranged from 3.8% (Frasers Centrepoint Trust) to 17.5% (Mapletree Commercial Trust). Data for tenants’ sales and footfall was mixed, as REITs with suburban malls exposure held up better than malls in the Orchard Road area.

Maintain NEUTRAL on S-REITs sector

We maintain NEUTRAL on the S-REITs sector, as the operating environment remains challenging, with some forms of headwinds facing each subsector. Uncertainties over the Fed funds rate hike also remain a concern for investors. The U.S. 10-year Treasury bond yield has recently seen a 40 bps spike from 1.89% on 20 Apr 2015 to 2.29%, and this corresponded with a decline in the FTSE ST REIT Index by 2.1%. We continue to adopt a bottom-up stock picking strategy, and retain Frasers Centrepoint Trust [BUY; FV: S$2.27], Frasers Commercial Trust [BUY; FV: S$1.65] and Starhill Global REIT [BUY; FV: S$0.93] as our top sector picks.

Source: OCBC Research - 20 May 2015