• Weakness seen in hospitality sector
• Flight to safety
• FCT, KDCREIT and MLT our top picks

Hospitality REITs the weak link during 4QCY15 earnings season

The 4QCY15 earnings season ended without any surprises for the S-REITs sector, as all 22 SREITs under our coverage reported results which met our expectations. Overall DPU growth came in at 1.9% on a YoY basis. The main drag came once again from the hospitality sector, which faced a challenging quarter, given the tightening of budgets by corporates and more intense competitive pressures from higher hotel room supply.

Other sub-sectors exhibited largely resilient performances. This includes the industrial sector, despite subdued manufacturing data points in Singapore. Under this segment, results of Mapletree Logistics Trust and Soilbuild Business Space REIT were stable, while Ascendas REIT and Mapletree Industrial Trust registered healthy improvement in DPU. Retail REITs had the best showing, delivering YoY DPU growth of 4.4%, led by overseas-focused REITs.

Large cap names have outperformed; implying a flight to safety

Since the start of the year, concerns over the impact of further interest rate hikes faded as fears over a slowdown in global economic growth quickly took over. This resulted in higher risk aversion and a flight to safety by investors, as exemplified by the compression in the U.S. 10- year Treasury bond yield from 2.27% (as at 31 Dec 2015) to 1.93%.

S-REITs, which are typically perceived as being more defensive in nature, have outperformed the STI YTD. The FTSE ST REIT Index has appreciated 3.2% YTD, versus the latter’s 2.6% decline. A further dissection on the returns of the individual SREITs revealed that the larger cap blue-chip names have been the outperformers, which is another illustration of the “risk-off” approach adopted by the market.

Interest rate outlook more dovish as compared to last Dec

Given concerns over the macroeconomic outlook as highlighted earlier, we note that expectations of another interest rate hike in the near-term have been tapered down. At the start of the year, the Fed fund futures had factored in a probability of 50.8% for a rate hike during the Mar FOMC meeting. Currently, the probability of this happening next week has fallen to just 4.0%.

Stay NEUTRAL, selective stock picks preferred

We continue to stay NEUTRAL on the broader SREITs sector, and believe a prudent bottom-up stock picking strategy remains key amid the challenging operating environment. We keep Frasers Centrepoint Trust [BUY; FV: S$2.25] and Keppel DC REIT [BUY; FV: S$1.24] as our top ‘Buy’ ideas. Following our downgrade of CapitaLand Mall Trust [HOLD; FV: S$2.10] on 3 Mar 2016 given its stellar share price performance, we replace it with Mapletree Logistics Trust [BUY; S$1.04] as our other preferred sector pick.

Source: OCBC Research - 11 Mar 2016