Data centre, industrial, healthcare Reits most resilient in recent sell-off

Singapore

THE recent selldown in Singapore real estate investment trusts (S-Reits) has been toughest on hospitality Reits but has left the data centre, industrial and healthcare-related Reits relatively unscathed.

Analysts see some bargains emerging but add that risks remain high and valuations are still above historical lows.

For the first quarter of this year, the FTSE ST Reit index has returned -24 per cent. Keppel DC Reit is the only S-Reit to have generated positive returns. Its outperformance parallels what is happening in the US, where data centre Reits are also trading at a premium to their peers.

CGS-CIMB Securities analyst Lock Mun Yee said the data centre sector is more resilient thanks to an uptrend in data creation and storage needs.

"In fact, we believe the current situation will benefit data centre operators such as Keppel DC Reit, due to higher data consumption as people work from home," she said. Keppel DC Reit is her top pick within the S-Reit space.

It has a long weighted average lease expiry (WALE) of 8.6 years, which gives it stable income visibility, Ms Lock said.

She expects its earnings growth to be driven by the three acquisitions it made last year and ongoing asset enhancement works. The Reit has only 4.2 per cent of its leases up for renewal this year, and the risk of non-renewal is low as relocation would incur migration risks and high capital expenditure for its tenants.

Parkway Life Reit was the fourth best performer among the S-Reits, with a total return of -7.6 per cent.

Ms Lock noted that the healthcare Reits offer some stability thanks to the income generated by their master leases, which come with in-built growth structures.

The large industrial Reits - Ascendas Reit, Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MIT) - also outperformed.

Maybank Kim Eng analyst Chua Su Tye noted that industrial Reits generally have longer WALEs compared to their peers.

"Importantly, Singapore industrial Reits have pushed overseas for growth since end-2015, and the overseas properties help improve their portfolio growth fundamentals as they are mostly freehold with tenancies commanding longer WALEs," Mr Chua added.

He likes Ascendas Reit and MIT as he believes both should see low negative impact to their distributions per unit (DPUs) and also upside from acquisition growth opportunities from visible sponsor pipelines.

Industrial Reits in the logistics space, such as MLT, should also benefit from increased online shopping during this period.

Citi Research recently noted that MLT's average term of security deposits at four months provides a liquidity cushion in the event of any tenant defaults. Its average arrears ratio remains low at about one per cent.

The hospitality Reits were hit the hardest, returning an average of -52 per cent, versus -29 per cent for office and retail Reits, and -25 per cent for industrial Reits.

Performance among the hospitality Reits is somewhat skewed by Eagle Hospitality Trust (EHT), which has returned -73 per cent from the start of the year till its suspension on March 24. Even so, all five of the worst performing S-Reits were in the hospitality sector.

None of the analysts polled by The Business Times are recommending that investors hunt for bargains in this sector though. They also say many of the stronger S-Reits are not yet at bargain prices despite the huge fall across the sector.

"We may still expect some volatility on share price action. This is because the sector's valuation is still not yet undemanding, after the strong run-up in the last two years, helped by yield compression and accretive acquisitions," said Maybank's Mr Chua. The large-cap Reits, in particular, are still 20 to 60 per cent away from their trough valuations based on their dividend yields and price-to-net asset value ratios.

Analysts said S-Reits are unlikely to repeat their global financial crisis underperformance, when their unit prices plunged about 70 per cent.

"S-Reits are now trading at an average yield of 6.9 per cent and a yield spread of 4.9 per cent. There were only four other times in history when the yield spread was higher, one of them during the global financial crisis when the yield spread spiked up to more than 12 per cent. Nonetheless, we do not see a repeat of the global financial crisis scenario where significant and dilutive fund raisings were required as asset values fell," said Kum Soek Ching, head of South-east Asia research in Credit Suisse's private banking research team.

"Today, the average sector gearing of 35 per cent is healthy, and it will take a very significant asset devaluation before the gearing hits the regulatory limit of 45 per cent."

In spite of the rental stream disruption associated with virus containment measures, Ms Kum still favours "selective Reits in the industrial and retail sector".

DBS, too, thinks suburban retail Reits and industrial Reits are likely to be able to maintain their dividends.

Mr Chua of Maybank likes CapitaLand Mall Trust, which is the largest Singapore Reit after its merger with CapitaLand Commercial Trust, on valuation grounds. Retail headwinds may impact up to 5 per cent of its DPU, but he sees a potential re-rating from scale and potential acquisition and development growth pipeline afterwards.