Maybank Kim Eng (MKE) analyst Chua Su Tye remains bullish on Singapore-listed REITs (S-REITs) given how they are still seen to give good yields, having gained about 2.4% m-o-m to outperform the market. This was boosted by a 20-30 basis points pull-back in the US Treasury 10-year yield since end-April.
“S-REITs currently trade at 2.7% above the 10-year government bond yield, undemanding versus peers, and should remain in favour against rising inflation pressures and expectations of strong DPUs into 2HFY2021,” writes Chua in a note on June 14.
He notes that “capital flows into yield names remain strong, underpinned by recovering cash flows and distribution per units (DPUs)”.
Among the S-REITs, Chua points out that “industrial REITs were the most aggressive in raising new equity of perps over the past 12 months and made up around 60% of a total $7.6 billion raised, to fund acquisitions”. Singapore’s three largest industrial REITs have managed to successfully raise some $3.5 billion in total over the last 12 months to fund acquisitions across Asean and the US.
At this point, the analyst has yet to fully factor into estimates DPU uplift as YTD deals for Ascendas REIT (AREIT) and Mapletree Industrial Trust (MINT) will only be completed after their respective upcoming EGMs, while they are trading at their recent placement valuations.
To that end, industrial rents are seen to be bottoming out as rents have further appreciated by 0.6% q-o-q in 1QFY2021, from a rise of 0.3% q-o-q in 4QFY2020, in line with the stronger GDP recovery, while vacancies have tightened for warehouse space.
The analyst believes that this will lead the sector’s recovery. “We expect the REITs to deliver DPU growth and for accretive acquisitions to pick up pace into the coming quarters,” he adds.
Meanwhile, thanks to Phase 2 (Heightened Alert), Covid-19 cases in Singapore has dropped. As at June 15, Singapore reported 14 community cases, compared to 38 cases on May 16, at the start of the Phase 2 (Heightened Alert). With that, Chua continues to back the reopening plays, as social distancing measures and restrictions have eased.
Chua believes this will lead to “S-REIT DPUs to rise at a two-year compound annual growth rate (CAGR) of about 6%, led by an increase of 8% to 20% jump for retail REITs.” Noting however, that the retail REITs “have not disclosed rental waivers, to offset weaker tenant sales, but we see limited impact to DPU at 0.5 to 1.5%”. Retail REITs are down about 1% to 5% since end-April, and imply attractive FY2021 dividend yields of 5% to 7%.
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To that end, Chua likes Sasseur REIT, Manulife US REIT (MUST) and Prime US REIT (PRIME) for small cap “buy”s that fit well into an S-REIT “yield+growth” screen, as their total return come in at 12% to 13%, above sector average. However, this premium is more significant if hospitality names are excluded (as average total return falls to 9.0%), given poor RevPAR visibility into 2022.
MKE has target prices of $1.05 for Sasseur REIT, $1 for MUST and $1.10 for PRIME.
Meanwhile, other S-REIT top “buy” picks include AREIT, Capitaland Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT), with target prices of $3.65, $2.55, $2.90 and $2.35, respectively.
On the other hand, Chua also sees tailwinds for US office REITs from improving market fundamentals, declining new infections and higher vaccination rates, with DPUs cushioned by low FY2021-2022 lease expiries, supported by well-placed assets and quality tenancies.
