Singapore REITs - UOB Kay Hian 2023-01-11: The Test Of Fire Makes Fine Steel

• Our stress test reveals that CapitaLand Ascott Trust, Frasers Logistics & Commercial Trust, Mapletree Industrial Trust and Mapletree Logistics Trust provide upside of 7%, 14%, 19% and 18% respectively even if interest rates maintain at peak levels on a permanent basis.
• We focus on S-REITs with resilient balance sheets to weather a protracted period of elevated interest rates. BUY
  • CapitaLand Ascott Trust (SGX:HMN) (Target price: S$1.37),
  • CapitaLand Ascendas REIT (SGX:A17U) (Target price: S$3.27),
  • Frasers Logistics & Commercial Trust (SGX:BUOU) (Target price: S$1.56),
  • Mapletree Industrial Trust (SGX:ME8U) (Target price: S$3.30) and
  • Mapletree Logistics Trust (SGX:M44U) (Target price: S$1.99).
• Maintain OVERWEIGHT.

We assessed the resiliency of S-REITs’ balance sheet – Who is the fairest of them all?

• We assessed the resiliency of S-REITs’ balance sheet based on the following 4 criteria:
  • Aggregate leverage: Frasers Centrepoint Trust and Frasers Logistics & Commercial Trust have the lowest aggregate leverage of 33% and 27% respectively after completing sizeable divestments.
  • Percentage of borrowings on fixed interest rates: Frasers Logistics & Commercial Trust and Mapletree Logistics Trust have the highest proportion of borrowings on fixed interest rates at 82%.
  • Weighted average debt maturity: CapitaLand Integrated Commercial Trust has the longest weighted average debt maturity of 4.1 years. CapitaLand Ascendas REIT, CapitaLand Ascott Trust, Mapletree Logistics Trust and Mapletree Industrial Trust are also well supported by banks with weighted average debt maturity of about 3.5 years.
  • Adjusted interest coverage ratio (ICR): Frasers Logistics & Commercial Trust has the highest adjusted ICR of 13x (post-divestment of Cross Street Exchange). CapitaLand Ascendas REIT, Mapletree Industrial Trust and Frasers Centrepoint Trust have ICR of above 5x.

Support of strong sponsor matters.

• Mapletree Logistics Trust, Frasers Logistics & Commercial Trust and CapitaLand Ascendas REIT are assessed to have the most resilient balance sheet, followed by CapitaLand Ascott Trust and Mapletree Industrial Trust.
• The top 8 most resilient S-REITs have the backing of strong sponsors in Mapletree Investments, CapitaLand Investment and Frasers Property.
• The benefits of having a strong sponsor are:
  1. Sponsor imposes discipline and prudent culture and ensures that the S-REIT adopts a conservative approach to capital management, and
  2. S-REITs are able to harness a strong relationship with banks within their respective real estate conglomerate.

Stress test to probe for vulnerability of S-REITs

• We performed a stress test on S-REITs assuming interest rates for all currencies stay at peak levels on a permanent basis. We utilise peak interest rates based on revised forecasts by UOB Global Economics & Markets Research (3M SIBOR: 4.55%, 3M Compounded SORA: 4.31%, US$ Fed Funds Rate: 5.00%, EUR Refinancing Rate: 2.75%, GBP Repo Rate: 4.00%, AUD Official Cash Rate: 3.10% and Y Policy Rate: -0.10%).

Not as fatal as widely feared.

• We observed that:
  • Most large-cap S-REITs remain profitable and continue to pay distributions even if interest rates stay at peak levels on a permanent basis.
  • Logistics REITs Mapletree Logistics Trust and Frasers Logistics & Commercial Trust provide upside of 18% and 14% respectively even if the stressed scenario materialises.
  • CapitaLand Ascott Trust and Mapletree Industrial Trust also provide attractive upside of 7%.
  • The downside is most significant at 10% and 30% respectively for CapitaLand Integrated Commercial Trust and Suntec REIT.

Maintain OVERWEIGHT on Singapore REITs

• The Fed expects core personal consumption expenditure inflation to recede gradually to 3.5% in 2023 and 2.5% in 2024. Based on the Fed’s dot plot, the Fed Funds Rate would be cut by 100bp to 4.1% in 2024. Thus, S-REITs have to weather higher interest rates in 2023 before the pressure eases in 2024.
• The sector provides attractive distribution yield of 5.97%, which is 1.1 standard deviation above long-term mean. Downside is limited to a correction of 8.4% if distribution yield spikes to 2 standard deviation above mean at 6.52%.

Weathering headwinds from higher interest rates.

• We focus on S-REITs with resilient balance sheets to weather a protracted period of elevated interest rates. BUY
  • CapitaLand Ascott Trust (SGX:HMN) (Target price: S$1.37),
  • CapitaLand Ascendas REIT (SGX:A17U) (Target price: S$3.27),
  • Frasers Logistics & Commercial Trust (SGX:BUOU) (Target price: S$1.56),
  • Mapletree Industrial Trust (SGX:ME8U) (Target price: S$3.30) and
  • Mapletree Logistics Trust (SGX:M44U) (Target price: S$1.99).
• Maintain OVERWEIGHT.
• See data tables in report attached below.

S-REITs sector catalysts

• Hospitality, retail and office REITs benefitting from the reopening and easing of COVID-19 restrictions in Singapore and around the region.
• Limited new supply for logistics, office and retail segments in Singapore.

S-REITs sector risks

• Escalation of the Russia-Ukraine war beyond Ukraine.