Singapore REITs - OCBC Investment 2022-12-05: Tug Of War Between Macro & Micro Factors

• We see downward risks to the street’s projections of S-REITs DPU. We recommend investors to position with higher quality S-REITs with strong sponsors and prudent capital management, given our house view that the US would enter a recession in 2023.

S-REITs' 9M22 earnings season provided little surprises on micro factors

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• The capital management metrics of the S-REITs under our coverage showed a marginal deterioration from 2Q22 to 3Q22. The average cost of debt rose 15 basis points (bps) q-o-q to 2.5%, as at 30 Sep 2022, and is poised to continue its ascent in the quarters ahead. Average gearing ratio rose 0.3 percentage points (ppt) q-o-q to 37.3%, while proportion of debt hedged declined from 74.0% (as at 30 Jun 2022) to 73.1%.
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• The largest negative impacted S-REITs from higher interest rates would come from Suntec REIT (SGX:T82U), CDL Hospitality Trusts (SGX:J85) and OUE Commercial REIT (SGX:TS0U). Besides higher interest rates, higher utility costs and currency fluctuations are other sources of headwinds for the sector.
• During this earnings season, we have cut our average/median DPU forecasts for the S-REITs under coverage by 2.5/1.5% and 4.3/2.9% for the current financial year and next financial year, respectively. Following our adjustments, we are now forecasting the S-REITs under our coverage to record a market cap-weighted DPU growth of 2.2% for the current financial year and 1.3% for the next financial year. Our DPU forecasts are on average 2.6% and 4.1% lower than Refinitiv consensus for the current financial year and next financial year, respectively. We see downward risks to the street’s DPU projections for S-REITs.

Maintain our cautious stance on the S-REITs sector in 1H23

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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-12-05 SGinvestors.io

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