Tuesday, December 10, 2013

S-REIT : Another volatile year as investors adjust to the higher interest rate environment (CS)

Property (REITs)
S-REITs kicked off 2013 with a strong start as investors look to the sector for growth + yield story. However, in May, the sector corrected sharply, falling some 20% on average within six weeks in light of the spike in US bond yields, as investors shied away from REITs due to less attractive yield spreads and concerns on higher borrowing costs' impact on profitability. Please refer to our earlier S-REITs report: Has the sector been oversold? Since the correction, selectively we have seen some slight recovery in the REITs, especially the liquid names, but still a far reach from its peak levels in April.

Another volatile year as investors adjust to the higher interest rate environment
Interest rates continue to be a key concern for investors looking at REITs: Based on our recent marketing feedback, we find that investors are generally concerned about REITs' profitability and ability to maintain their payout in a rising interest rate environment, especially those which are facing competitive pressure which may impact their ability to raise rents/occupancies.

Increasingly challenging acquisition environment: In addition to the competition pressure that we are facing across most subsectors, especially on the hospitality and commercial front (and business parks), we note that the higher weighted average cost of capital today has not been supportive of acquisitions. We see 2014 as another challenging year for acquisitions as there are no motivated sellers given the healthy liquidity in the markets, yet given the higher costs of acquisitions, the higher hurdle rate would imply less motivated buyers.

Sub-sector outlook
Office—stick to Grade As: Given where rents are—the gap between Grade A and Grade B offices close to an 18-year low—we believe there is downside risk to Grade B rents as we anticipate the discount (versus Grade A) to widen again, given competition from business parks and newer office schemes (as rents are not significantly higher versus Grade B). We expect low single digit rents growth at best for the Prime Grade A office given the supply outlook, but caution that Grade B rents may see declines from competition.

Retail—suburban malls more defensive: We prefer suburban malls, as we expect these malls to benefit from the population’s rising affluence (underpinned by low unemployment rates), with strong occupancies and continuing upward trend in rental growth, followed by Orchard malls (selectively positive on the best malls). We are least positive on downtown malls due to intense competition—evident in the increased vacancies QoQ, which could put some pressure on rents.

Industrial—prefer logistics, negative on longer-term business parks: Vacancy risks in business parks and the potential weakness in Grade B offices could impact the ability to raise rents in 2014. Factory and warehouse continue to see healthy demand with occupancies sustaining above 90%—supportive of rental growth. In addition, we believe that Iskandar is more of a longer-term threat, as the near-term infrastructure is not quite in place as yet. We believe the motivated movers to Iskandar at this stage of the development should mainly be land-intensive businesses such as construction.

Hospitality—medium-term outlook remains positive: New supply has disrupted the industry's REVPAR growth this year as many hoteliers (who were not used to this type of supply as the industry saw a structural shift post the two integrated resorts) reacted sharply to the new competition and dropped rates, even if occupancies eventually came through. Demand for hotels has been strong with visitor arrivals coming in better-than-expected with 9M13 visitor arrivals up 8.7% YoY (STB full-year forecast: 2.8-7.6%); system occupancies for 9M13 was also healthy at 87% despite 2,600 new rooms hitting the market. However, the industry failed to capitalise on the strong performance. We believe this is part of the learning curve as Singapore's tourism story is relatively new and we expect hoteliers to react more rationally going into 2014.

Risks to earnings
Interest rates should not have as profound an impact vs GFC days: Post the Global Financial Crisis, most of REITs have a flatter debt expiry profile and a higher percentage of their debts fixed, which may help "smoothen" out the impact of higher interest rates on the REITs' profitability. This allows management time to manage their top line growth as well, as they try to offset the higher interest costs and maintain distribution yields.

Other key issues
Capital raising risk—not necessarily a bad thing: Investors generally view equity raising as a negative event for the REITs from a dilution perspective. However, we believe that it is sometimes a necessary evil as most REITs generally pay out 100% of their distributable income, which means any future acquisition growth will likely have to be part equity funded. We see this as a "better entry window" since the market tends to have an immediate negative reaction upon the announcement of a dilutive exercise—generally to part finance an acquisition—but may eventually recover if the acquisition is accretive.

Stock picks
As the sector is expected to be volatile, we see little reason to be active in the sector in a meaningful way. As such, we believe investors who may still have the appetite for REITs are likely looking at REITs from a defensive standpoint. Retail and logistics are the two most defensive subsectors.
MCT, CMT and MLT are our defensive picks
■ CapitaMall Trust (CMLT.SI, OUTPERFORM, TP S$2.47): CMT's has one of the most resilient portfolios, with over 70% of the malls within its portfolio catering to "necessity shopping". Occupancy sustained >98% throughout SARS in 2003 and the 2008-09 sub-prime crises. Key pushback from investors is the valuations, but we believe that after rolling forward into FY14 yields, the 5.8% yields are relatively attractive given its defensive outlook, with growth coming from the fruition of AEIs and acquisitions.

■ Mapletree Commercial Trust (MACT.SI, OUTPERFORM, TP S$1.45): VivoCity continues to be a key growth anchor for the REIT, with the asset accounting for around 64% of NPI. Meanwhile, two of its three office assets have relatively long leases, mitigating near-term vacancy risks for the office portfolio. The stock trades on an attractive 5.9% FY14E yield.

■ Mapletree Logistics Trust (MAPL.SI, OUTPERFORM, TP S$1.42): High earnings visibility with five-year weighted average lease expiry (WALE). It has a defensive
tenant base as well with consumer durables and staples (and F&B) type tenants accounting for around 50% of revenue. We also highlight portfolio occupancy held above 97% even throughout the Global Financial Crisis. Acquisitions should be a positive growth kicker. Of its FY14 distributable income, 94% has already been hedged into/derived in SGD. The stock offers attractive 6.8% FY14E yield.

OUEHT and MINT look attractive from a risk-reward perspective
■ OUE Hospitality Trust (OUER.SI, OUTPERFORM, TP S$1.04): Not as volatile as perceived given master lease structure—adding the fixed income component (S$45mn) from Mandarin Orchard Singapore and the retail component, 71% of gross revenue is hence relatively "resilient". Meanwhile, because of the AEIs for the 430 rooms, and the assets' strategic positioning on Orchard Road, we believe that REVPAR growth is likely to continue even amidst competition, as it has demonstrated this year. The stock offers an FY14E 7.4% yield.

■ Mapletree Industrial Trust (MAPI.SI, OUTPERFORM, TP S$1.67): We believe risk-reward is relatively attractive at 7.3% FY14E yield, as we still expect to see positive DPU growth coming from: (1) rent reversions coming from its expiry of the rental caps applicable for the JTC Tranche 2 acquisitions, which will expire on 23 August 2015; and (2) asset enhancement and build-to-suit project conversions, which will result in higher rentals post completion.

Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 09/12/13

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Tan Teng Boo

There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
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