Singapore REITs Monthly - Temporary pain; impending rally

• FTSE S-REIT Index dipped 1.3% MoM, as interest rates climb. Hospitality REITs led the pack while overseas industrial SREITs were the biggest losers (-11.4ppts MoM) due to refinancing jitters surrounding EC World REIT (ECWREIT SP Equity, Not Rated) and a high proportion of unhedged interest rate and higher interest costs.
• Based on the median FOMC member’s Fed fund rate forecast of 3.4% at year end, we could see another 165 bps increase in the Fed rate. Our research team believes that the rate of interest rates hikes would likely peak in 3Q22 before moderating.
• We remain OVERWEIGHT on the REIT sector with preference on the office and hospitality sectors. SREITS under our coverage are expected to deliver FY22e DPU yields of 4.3-9.9%. We remain OVERWEIGHT on the REIT sector as we think REITs could rally once central banks begin lowering rates.

SECTOR ROUND-UP

The FOMC meeting on 15 June 2022, cumulated in a 75bps increase, raising the Fed rate from 0.75-1.0% to 1.5-1.75%. The median FOMC member expects the Fed fund rate to be 3.4% at year end, up from Mar 22’s forecast of 1.9%, suggesting a much steeper rate hike path. However, we believe that the impending interest rate hikes have been largely priced in. The FTSE REITs Index has pulled back 3.6% YTD and REITs under our coverage are expected to deliver FY22e DPUs of 4.3-9.9%. Based on our sensitivity analysis, a 150bps increase in cost of borrowing will lower FY22e DPU by 3-13% on a hedged basis, resulting in DPU yields of 3.7-9.2% (Figure 3 and 4), which is a at the respective SREIT’s average DPU yield. At the most conservative, assuming no interest rate hedge, our sensitivity analysis reveals a 12-23% cut in FY22e DPU and DPU yields of 3.3-8.3%.

The proposed privatisation of Frasers Hospitality Trust (FHT SP, not rated) was announced on 13 June 2022. The sponsor, Frasers Property Limited (SPL SP, not rated), has offered to acquire all issued stapled securities of FHT, excluding those owned by TCC group (36.72%) and FPL subsidiaries (25.8%). The scheme consideration of S$0.70 per stapled security is at a 45% premium over the 1-month VWAP and a 7.1% premium to NAVPS. The implied P/NAV of 1.07x is a 42.3% and 33.2% premium to the 3- and 5-year average P/NAV of FHT. The scheme will increase FPL’s ownership of FHT from 25.8% to 63.28%, with the remaining units held by TCC Group. The privatisation was initiated by FHT following a strategic review by FHT’s independent directors, which concluded that the privatisation by FPL would allow unitholders to realise their investments with a high degree of certainty given the (a) strengthening of the Singapore dollar against FHT’s operating currencies; (b) uncertainty in recovery and outlook; and (c) FHT’s small size and liquidity which has hindered index inclusion and flexibility in pursuing inorganic growth.

Retail

Workplace capacity was raised to 75% and 100% from 29 March and 26 April respectively. Apr22 RSI (ex. MV) climbed 15.7% YoY, punching 4.5% above Apr19 levels, with most sectors in the green except mini-marts and optical goods & books. Discretionary categories like fashion (+42.4%), department stores (+31.0%), watches & jewellery (+25.2%) and F&B (+35.7%) were the outperformers, as more employees return to offices. The F&B services index was 3.0% below Apr19 levels, the tightest since the start of the pandemic. Return to office has spurred more corporate and social dining, while the pickup in events and inbound tourism should give 2H22’s numbers a boost.

Hospitality

May 22’s IVA jumped 42% MoM after the removal of pre-departure testing requirement for fully vaccinated travellers. This was 28% of pre-pandemic IVA, a significant improvement compared to Apr 22 and Mar 22’s 19% and 8% respectively. Apr 22 RevPAR jumped 19.4% Mom and 66.6% YoY, at 73.5% of pre-pandemic levels compared to 62.4% in Mar 22. According to Singapore Tourism Board, at least 66 international events are slated to happen in Singapore for the rest of 2022. This includes MICE events that have previously been held in Hong Kong such as the Jewellery and Gem World Singapore, SuperReturn Asia and Cosmoprof Asia and wine and spirits exhibition, Vinexpo Asia. The higher corporate and leisure demand is expected to support average daily rates (ADRs) and consequently RevPAR.

INVESTMENT RECOMMENDATION

Maintain OVERWEIGHT on SREITs

SREITs are not spared from the ongoing geopolitical uncertainty, inflationary cost and market volatility. The higher interest rate will hit SREITs on two fronts – higher interest expense, as well as slowing acquisition momentum from higher cost of financing. We may see some downward DPU pressure from higher interest and operating expenses.

The raising of interest rates is intended to keep inflation and growth in check. Share prices have pulled back in anticipation of the higher interest rate environment and appear to have been largely priced in. Our research team believes that the rate interest rates would likely peak in 3Q22 before moderating. We remain OVERWEIGHT on the REIT sector as we think REITs could rally once central banks begin lowering rates.