Ahead of the Singapore REIT (S-REIT) sector’s upcoming quarterly results and following Maybank Securities’ 2024 REITs outlook report, analyst Krishna Guha has maintained his “neutral” call on the industry.
In his note dated Jan 17, Guha looks at the distribution per unit (DPU) sensitivities and ranks the REITs according to debt metrics.
“The market’s focus is likely to be on asset values and management commentary about any benefits from potential interest rate cuts. Notwithstanding high-base effects, the distribution for hospitality and retail may eke out growth while office and industrial may be stable,” says Guha.
Majority of queries from investors on the 2024 outlook report focused on the individual REIT’s positioning for potential interest rate cuts, says Guha.
The analyst notes that investors continue to focus on yield, with questions around timing, the extent, and impact of interest rate cuts. Interestingly, the analyst says that a few investors were focused on how individual REITs are trying to preserve net asset value (NAV) and/or realise the NAV discount.
On average, the analyst says that every 50 basis points (bps) change in base rates impacts DPU by 3.2%. While sentiment is likely to improve for REITs with high gearing/low interest
coverage ratios, key is disclosure of debt cost of upcoming maturities in 2024 and 2025.
Based on the average debt maturities, Guha’s basecase view is that passing debt cost is still way below current market rates. Hence, repricing will be higher unless swap rates fall another 150 bps from current levels.
“Based on reported DPU sensitivity, Suntec REIT, CDL Hospitality Trusts J85 (CDLHT) and Far East Hospitality Trust Q5T (FEHT) are expected to benefit the most,” says Guha.
Meanwhile, the analyst makes a preview of the REIT’s upcoming results season. He says that asset values, debt refinancing and M&As are likely to be the key areas of focus, while devaluation of offshore assets will continue even if transaction volumes are limited.
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“It will be interesting to note if managers talk up any high-priced debt/hedges, which can benefit from potential interest rate cuts or have used recent declines in funding cost to reprice debt/raise hedge ratios,” Guha adds.
The analyst also makes a note that guidance on margins and impact of carbon taxes, higher goods and services tax, and sticky utility and labour costs will be raised.
For industrial REITs, Guha says that supply chain disruption and manufacturing green shoots may only be topical. For commercial REITs, he notes that management guidance on retail-rent reversion and office lease renewals will be crucial.
Finally for hospitality REITs, forward bookings for hotels will be in focus due to slowing arrival statistics, a calendar full of events and visa-free travel arrangements from China, the analyst notes.
Following the rally late last year, the REIT sector performance stalled with the index down 2.0% (compared to the benchmark Straits Times Index’s -1.7%) as 10-year government-sector yields crawled back from recent lows of 3.55% to 3.80% currently.
“We expect the sector to trade in line with the risk-free rate and we retain a neutral view,” says Guha.
