• 2QCY18 DPU down marginally
• Government bond yields have eased
• Top picks: MAGIC, KDCREIT, FCT and FLT

2QCY18 Results Roundup

Looking at the recently concluded 2QCY18 results season, all the 23 S-REITs under our coverage reported results which met our expectations. The average DPU growth came in at -0.8% on a YoY basis, versus -2.6% in 1QCY18.

Notwithstanding this overall decline, we note that 12 out of the 23 S-REITs recorded positive DPU growth, eight had negative growth while the remaining three saw no change in their DPUs.

Looking ahead, we have tempered our expectations for the hospitality sector, and now expect more muted DPU growth from hospitality REITs under our coverage.

For our entire coverage universe, we are projecting stable DPU growth (market-cap weighted) of 1.7% for the current financial year (FY18/19F) and 1.6% for the next financial year (FY19/20F).

Credit Metrics Largely Healthy; Overseas Expansion Continues

From a balance sheet perspective, the S-REITs under our coverage have remained prudent on their capital management. The average gearing ratio stood at 35.4%, as at 30 Jun 2018, versus 35.3% at the end of 1Q18.

The proportion of borrowings hedged/fixed increased from 73.9% to 75.1%. This has been supported by the stabilisation in the SGD interest rate swaps, which declined slightly from May highs, although still higher than start of the year.

Following the emerging trend of S-REITs penetrating into new geographical markets, we also saw the subsequent announcement of Ascendas REIT’s (A-REIT) proposed acquisition of a portfolio of 12 logistics assets in the UK. There were also continued activities on the capital recycling front, with A-REIT and Mapletree Logistics Trust being particularly active.

Finding Defensive Shelter Amid Macroeconomic Uncertainties

We see some near-term respite for the S-REITs sector as the Singapore government 10-year bond yield has eased ~29 bps to 2.40% (as at 3 Sep) from its YTD peak of 2.68% in May. We are cognisant that the current forward yield spread remains relatively tight at 363 bps, or 1.1 standard deviations below the 5-year mean (408 bps). However, the ongoing macroeconomic uncertainties emanating from the US-China trade friction and concerns over economic contagion from Turkey have dampened investors’ sentiment and resulted in a flight to defensive ideas.

During the recent Jackson Hole symposium, Federal Reserve Chairman Jerome Powell highlighted that there is no clear sign of inflation overshooting above 2%, and reiterated the Fed Committee’s view that the gradual process of normalisation remains appropriate. We thus believe S-REITs can warrant a strategic position in investors’ portfolio, but in a selective manner.

Overall, we are NEUTRAL on S-REITs. Our preferred picks are Mapletree North Asia Commercial Trust [BUY; FV: S$1.42], Frasers Logistics & Industrial Trust [BUY; FV: S$1.18]. From a tactical positioning, we would prefer S-REITs to SG developers at this juncture.

Source: OCBC Research - 4 Sept 2018