Singapore REITs Monthly - Phillip Securities 2024-05-20: Pricing In Higher-For-Longer Interest Rates

• The S-REITs Index fell 3.1% in April after gaining 0.6% in March, following the Fed’s reiteration of its higher-for-longer interest rate stance. The top performer for the month was Cromwell European REIT (SGX:CWBU) – it gained 8% in April after the ECB signalled it would likely cut interest rates in June. The worst performer was Prime US REIT (SGX:OXMU), which fell 17.6% as it has yet to refinance its US$480mil loan maturing in July 2024.
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• S-REITs share price are now trading at a forward dividend yield spread of ~3% (-1.5x standard deviation) and a P/NAV of 0.86x (-2x standard deviation).
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SECTOR ROUND-UP

• The Fed kept the federal funds rate unchanged at 5.25-5.5% for the sixth straight meeting on 1 May and remains cautious on interest rates cuts this year - it will need to see more positive signs that inflation is moving towards its 2% target.
• With lower interest rates, S-REITs will benefit from
  1. lower financing costs,
  2. higher dividend yield spreads over bonds, and
  3. higher property valuations as cap rates compress.
• Furthermore, weexpect deal-making to pick up pace with interest rates peaking. Therefore, we expect a sector recovery in 2024-2025.
• 1Q24 performance for S-REITs under over coverage was mostly within expectations, with rental reversions for office and retail coming in above our expectations.
• We noticed that many S-REITs are divesting non-core assets as part of their deleveraging strategy to lower gearing and strengthen their balance sheet. One example would be Prime US REIT (SGX:OXMU), which recently divested One Town Center in Boca Raton, Florida, for a price of US$82mil, US$2.8mil below its most recent valuation. We think this divestment trend will continue into 2024-2025 as the transactions market gradually gains momentum.

Retail sector

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Darren Chan Phillip Securities Research | Liu Miaomiao Phillip Securities | https://www.stocksbnb.com/ 2024-05-20 SGinvestors.io

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