• DPU slipped 1.5% YoY in 4Q19; projecting 3.2- 4.0% growth in FY20F and FY21F
• Supportive measures from Budget 2020 to partially mitigate COVID-19 impact
• Top picks: AREIT SP, CT SP, SUN SP and ART SP

4QCY19 Results Largely Met Our Expectations

For the recently concluded 4QCY19 earnings season of the 21 S-REITs under our coverage, two beat (MCT SP and ART SP), three fell short (AREIT SP, SBREIT SP and KDCREIT SP) while the remaining 16 met our expectations. DPU slipped 1.5% YoY on a market-cap weighted basis.

The main drags came from Ascendas REIT (-12.3% YoY; timing differences from rights issue and completion of acquisitions) and Mapletree North Asia Commercial Trust (-13.3% YoY; temporary closure of Festival Walk mall, which has since re-opened). Out of these 21 names, eight REITs delivered positive YoY DPU growth during the quarter, ten saw weaker performances and three had unchanged DPU.

Projecting DPU Growth of 3.2% in FY20F and 4.0% in FY21F

We are projecting a pick-up in DPU growth to 3.2% (market-cap weighted) in FY20F. This would be driven largely by a full-year contribution from acquisitions completed in 2019, asset redevelopments and asset enhancement initiatives (AEIs).

Unfortunately for the hospitality sub-sector, 2020 was initially expected to be a strong year given biennial events, but earnings visibility has now been dampened with the COVID-19 outbreak. For FY21F, we are projecting our coverage universe to register DPU growth of +4.0%. Our sub-sector preference (in order of preference): Industrial, Retail, Office and Hospitality.

Budget Goodies to Mitigate COVID-19 Woes – Retail and Hospitality REITs to Benefit the Most

Budget 2020 highlighted the Singapore government’s resolve to support the economy amid the COVID-19 outbreak, as an expansionary fiscal budget amounting to S$10.9b, or 2.1% of GDP, was announced on 18 Feb.

One of the measures announced during Budget 2020 was a corporate income tax rebate of 25% for companies (capped at S$15k) for Year of Assessment 2020. Although we do not expect this to benefit S-REITs directly, there would be an indirect benefit as their tenants would enjoy income tax rebates, and this will help to support their cashflows.

A property tax rebate of 15% will be provided to qualifying commercial properties (food services and retail business related). We are expecting most, if not all of the rebates to be passed on by retail REITs to their tenants.

For licensed hotels and serviced apartments (accommodation and function room components), as well as prescribed MICE venues, the property tax rebate would be 30%. Hence, besides the hospitality REITs with Singapore hotels/serviced apartments, Suntec REIT’s convention business will also be a beneficiary of this initiative.

Other notable announcements include a one-off cash payout of S$100-S$300 for Singaporeans aged 21 and above, and a deferment of the GST hike until after 2021 (i.e. GST to remain at 7% in 2021). We believe these supportive measures will provide some boost to consumption spending and are positive for the retail landscape.

Yield Compression Theme Still Has Legs to Run

Since we highlighted in our 15 Nov report that we had a bias to the upside on the S-REITs sector and there were bargain hunting opportunities for high quality names, the FTSE ST REIT Index (FSTREI) has delivered total returns of 6.6%, versus -2.2% for the Straits Times Index. The addition of Ascendas REIT (AREIT SP) into our top picks list has also worked well for us, with total returns of 12.9% during the same period.

Overall sector valuations are by no means cheap, but we expect the global yield hunting phenomenon to continue to drive compression in spreads amid a low interest rate environment, ample liquidity in the markets and uncertainties over the economic outlook given the COVID-19 situation.

The forward yield spread between the FSTREI (5.34%) and the Singapore government 10- year bond yield (1.58%) last stood at 376 bps. This is 0.6 standard deviation (s.d.) below the 10-year mean of 411 bps. Although S-REITs will not be immune to the vagaries in this current environment, we do expect some forms of resiliency in their operational performance, with the exception of the hospitality sub-sector.

Financial prudence also remains one of the S-REIT’s sector’s investment merits, with an average gearing ratio of 35.2% (as at 31 Dec 2019) for the SREITs under our coverage and 76.3% of total borrowings on fixed interest rates or hedged.

We keep Ascendas REIT (AREIT SP) [BUY; FV: S$3.59], Suntec REIT (SUN SP) [BUY; FV: S$2.05] as our preferred sector picks, and add Ascott Residence Trust (ART SP) [BUY; FV: S$1.40] to the list given its more defensive longer-stay business model, ample capital reserves (~S$130m) for top-ups and good likelihood of inclusion into the FTSE EPRA Nareit Global Real Estate Index Series in Jun 2020. Within the small-mid cap space, we like ESR-REIT (EREIT SP) [BUY; FV: S$0.60].

Source: OCBC Research - 25 Feb 2020