PhillipCapital Research is remaining “overweight” on S-REITs even as most of them posted y-o-y declines in distributions for the quarter ended Dec 31, 2023 as higher finance costs eroded distributable income.
The S-REITs Index fell 4.4% in January after gaining 8.9% in December 2023. The top performer for the month was Frasers Centrepoint Trust J69U (FCT), which gained 1.8% after “commendable” results and the proposed acquisition of a further 24.5% stake in Nex shopping mall, write analysts Darren Chan and Liu Miaomiao in a Feb 19 note.
Meanwhile, the worst performer was Prime US REIT OXMU , which fell 30.4% after gaining 95.1% the month earlier, due to portfolio valuation and gearing concerns.
The retail sub-sector was the outperformer in January, gaining 0.3%, lifted by FCT. The worst performing sub-sector was overseas commercial, which fell 13.2% after gaining 39.7% in December 2023, dragged down by US office S-REITs.
Chan and Liu favour S-REITs as the market enters a monetary easing cycle. “We continue to favour REITs with a healthy balance sheet, strong sponsors and improving operating metrics, such as REITs in the hospitality and retail sub-sectors.”
Their top picks are FCT and CapitaLand Ascott Trust HMN (CLAS), which earn “accumulate” calls and target prices of $2.38 and $1.04 respectively. FCT and CLAS closed at $2.21 and 92 cents on Feb 19 respectively.
DPU contraction
S-REITs are now trading at their 10-year average forward dividend yield of some 6.1%, note Chan and Liu. P/NAV of 0.9x is 1.4x s.d. below the mean of 1.03x. From the 23 S-REITs that have announced dividends thus far, 74% saw a contraction in distribution per unit (DPU).
So far, most REITs here remain within the Monetary Authority of Singapore’s (MAS) leverage limits, apart from Manulife US REIT (MUST). As at Dec 31, 2023, MUST’s aggregate leverage ratio is 58.3%. MUST has halted its distributions since 1HFY2023 ended June 30, 2023.
After postponing its results for FY2023 ended Dec 31, 2023, Keppel Pacific Oak US REIT (KORE) is the first REIT to voluntarily suspend distributions in order to conserve capital and to maintain its leverage within regulatory limits and bank debt covenants.
Completing the trio of US office S-REITs is Prime US REIT, which will release its FY2023 results after the market closes on Feb 21.
Meanwhile, Keppel DC REIT’s 16.1% y-o-y DPU decline was mainly due to the uncollected rental and coupon income of 5.5 months, amounting to $10.5 mllion at the Guangdong data centres.
On the flipside, the highest growth in DPU came from hospitality S-REITs.
Far East Hospitality Trust (FEHT) and CLAS posted double-digit DPU growth as net property income (NPI) growth outstripped rising finance and operating costs, note the analysts.
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Hospitality and retail shine
Singapore’s international visitor arrivals grew 54% y-o-y in January to 1.4 million, boosted by the Coldplay concert in late-January. It is, however, still at 15% below pre-Covid-19 levels, write Chan and Liu.
The return of Chinese travellers has been slower than expected, currently at 35% of pre-Covid-19 levels, but the analysts expect this to pick up in 2024, supported by the 30-day visa-free entry for Chinese citizens.
They expect Singapore’s international visitor arrivals to return to normalcy by early 2025.
Revenue per available room (RevPAR) at hospitality S-REITs fell 4.8% y-o-y in December 2023, with average daily room rates and occupancy falling 0.7% and 3.2 percentage points (ppts) y-o-y respectively.
December 2023 numbers suggest that room rates may have peaked as consumers grow more price-conscious, say the analysts. “However, with Coldplay in town towards the end of January, we expect RevPAR to return to growth in January. The solid line-up of concerts along with a packed MICE schedule in Singapore will underpin RevPAR growth in 2024.”
They add: “We think the hospitality sub-sector will be able to generate the most DPU growth on the back of higher RevPAR and the gradual reopening of China as outbound flight capacity from China increases.”
Meanwhile, the December 2023 retail sales index (excluding motor vehicles) fell 2.7% y-o-y, compared to the 1.3% growth in November 2023.
Most industries recorded a y-o-y decline, with recreational goods being the biggest decliner at 12.9% due to lower demand for sporting goods, note the analysts.
Watches and jewellery recorded the highest y-o-y growth at 6% due to a greater demand for jewellery, but it fell from 12.9% the month prior.
The F&B services index rose 0.3% y-o-y in Dec 23, extending the 1.6% growth in November 2023, with food caterers (+14.5%) experiencing the largest growth. However, restaurants and fast-food outlets saw a y-o-y decline of 4.8% and 2.9% respectively.
“We think retail sales will be resilient in 2024 especially after the announcement of a further $1.9 billion enhancement to the GST Assurance Package, which includes an extra $600 in CDC vouchers for all Singaporean households and a cash payment of $200 to $400 for eligible Singaporeans,” say the analysts. “The $200 in LifeSG credits for all national servicemen will also support retail sales growth going forward.”
Suburban retail offers resilience in a downturn, note the analysts, while downtown retail stands to benefit from the recovery of international visitor arrivals, which will, in turn, lift tenant sales and sentiment.
Infographics: PhillipCapital Research
