SINGAPORE (Apr 18): Maybank Kim Eng is staying positive on industrial REITs despite the recent pullback in share prices against a rising interest rate environment.
"We see positive earnings momentum led by the large cap names from improving supply and demand, with near-term catalysts rising occupancies and stable/positive rental reversions," says analyst Chua Su Tye.
Chua sees limited risks from higher interest rates given the sector’s well-cushioned balance sheets, with potential acquisition growth upside not priced in.
"Valuations remain compelling, especially for Ascendas REIT (AREIT) and Mapletree Industrial Trust (MINT), given their headroom for accretive deals," says the analyst in a recent report.
In the first two months of 2018, overall leasing activity jumped 35% y-o-y, the strongest since 3Q13.
Chua anticipates stronger leasing demand in tandem with improving manufacturing growth and a broader recovery in services. Industrial rents showed signs of bottoming out in 4Q17 at –0.1%, its slowest decline in 11 quarters.
He also expects rents to stabilise in 2018 and forecast 1-3% annual growth in 2018-2020, helped by easing supply of just 2% in 2018 and 0.8-1.0% until 2020.
"We see further moves towards overseas diversification, with AREIT and MINT best-placed to deliver on accretive deals, given their clear mandates and substantial debt headroom," adds Chua.
Meanwhile, ROFR pipeline assets could boost options against a backdrop of tighter cap rates.
AREIT's sponsor has over $1 billion of business parks and light industrial factories in Singapore covering 400,000 sqm, including the Ascent at Kent Ridge with NLA 42,700 sqm which was completed in Mar 2016 and now 99% occupied.
MINT's pipeline includes the $250 million 18 Tai Seng development with NLA of 35,700 sqm which obtained its TOP in 4Q16.
Chua says both divestment and redevelopment opportunities are supported by the REITs’ longer land tenures as 50% of their assets exceed 40 years, a contrast to the 20-year tenures for new government land sale sites.
Maybank has target prices of $3.05 and $2.20 for AREIT and MINT respectively.
As at 12.33pm, AREIT units are trading at $2.70 with an FY18 dividend yield of 6.2% while MINT units are trading at $2.01 with an FY18 dividend yield of 5.9%.
