• 1.3% YoY DPU growth for 2Q19
• Hunt for yield remains strong
• Top picks: KDCREIT SP, MAGIC SP, SUN SP

2QCY19 Results Largely Within Expectations

For the recently concluded 2QCY19 earnings season, out of the 20 S-REITs under our coverage, 15 met our expectations, 1 beat (ESR-REIT) and 4 missed. DPU growth on a market-cap weighted basis came in at +1.3% YoY.

Office Rental Reversions Robust While Retail REITs Resilient…

Office REITs saw healthy rental reversions during the quarter. Keppel REIT delivered positive rental reversions of 17.8%, although this was for a small percentage of its portfolio. CapaitaLand Commercial Trust also had a solid quarter, with the lowest end of its committed rents coming in above its average expired rents.

For Suntec City, rental reversions for Suntec City Office were +7.9%, while ORQ and MBFC were at double-digits. Notwithstanding this robust performance, corporate expansion seems to have slowed, given the macro uncertainties. CBRE data also points to a moderation in core CBD Grade A rental growth (+1.3% in 2Q19 versus +3.2% in 1Q19).

Meanwhile, retail REITs continued to showcase resiliency. CapitaLand Mall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust registered positive rental reversions of 1.8% (1H19), 3.1% (3QFY19) and 7.3% (retail segment for 1QFY20), respectively.

…however Hospitality Disappointed and Industrial Outlook Patchy

Hospitality REITs had a poor quarter, with negative RevPAR growth for CDL Hospitality Trusts (-1.7% YoY, partly due to refurbishment works) and Far East Hospitality Trust’s Hotels segment (-4.5% YoY). The latter’s Serviced Residences segment saw an improvement in RevPAU by 3.0% YoY. Industrial REIT’s performances continue to be mixed, with downside risks to near-term prospects.

Central Banks Jumping on Easing Bandwagon, Hunt for Yield Continues

Demand for REITs remains fluid as exemplified by the strong subscription rates of REITs which have carried out equity fund raising exercises recently. This is unsurprising, as many countries have now embarked on monetary easing, thus pushing yields lower (and some deeper into negative territory).

The ‘flight to safety’ theme also continues, with continued geopolitical and macroeconomic uncertainties. The forward yield spread between the FTSE ST REIT Index (5.35%) and the Singapore government 10-year bond yield (1.78%) last stood at 357 bps. This is 1.1 standard deviations (s.d.) below the 8-year mean of 421 bps, and is less demanding compared to the beginning of Jul when the yield spread was at the tightest level YTD (324 bps; -1.6 s.d.).

This has been largely driven by the Singapore government bond yield coming down rather than unit prices correcting sharply. We maintain NEUTRAL on S-REITs. Our top picks are Keppel DC REIT (KDCREIT SP) [BUY; FV: S$1.93] (strong inorganic growth potential), Mapletree North Asia Commercial Trust (MAGIC SP) [BUY; FV: S$1.43] (resilient operations), and Suntec REIT (SUN SP) [BUY; FV: S$2.07] (compelling value relative to peers). For investors looking within the small-midcap space, we like ESR-REIT (EREIT SP) [BUY; FV: S$0.58] and Starhill Global REIT (SGREIT) [BUY; FV: S$0.81].

Source: OCBC Research - 21 Aug 2019