SINGAPORE (June 12): With DPU uncertain, yield may not be the best indicator of value for REITs. As at March 31, the net asset values of most REITs stayed relatively stable. Hence P/NAV has been used in an attempt to identify undervalued REITs.
Among the REITs with the lowest P/NAV are Far East Hospitality Trust (FEHT), Sabana Shariah Compliant Industrial REIT and Starhill Global REIT (SG REIT). FEHT and Sabana REIT have Singapore assets and hence are not subject to foreign currency risk. Moreover, FEHT has a strong sponsor in Far East Organization which holds around 61% of the trust.
Although conditions for FEHT are likely to remain difficult for the rest of this year, the sponsor’s interest is totally aligned to those of minority unitholders. While master lease rents are questionable in certain cases — in an IPO in 2019, Eagle Hospitality Trust financially engineered a valuation based on its master lease — FEHT’s master lease rents provide genuine support.
This comprises $67 million of rent annually. In FY2019, FEHT reported rental revenue of $115 million, so the support is significant and is likely to provide downside protection this year.
Sabana REIT — under its new management — has experienced a lot more stability in the past two years, the oversupply in the industrial sector notwithstanding. In 1QFY2020 ended March, its manager announced positive rental reversions of 6.2%, and occupancy rebounded to 77% from 75.4% in 4QFY2019.
DBS Research points out that the manufacturing sector is likely to emerge from the recession first, and industrial REITs are a reasonable proxy for this sector. While the average P/NAV is 1.5 times for the sector — due to the strength of Mapletree Industrial Trust, Mapletree Logistics Trust and Ascendas REIT, Sabana REIT trades at just 0.66 times P/NAV. While Sabana REIT is unlikely to trade at a premium, it could narrow the discount vis-a-vis the sector.
In a spot of positive news, Ascott Residence Trust will be included in the FTSE EPRA Nareit Global Real Estate Index Series (Global Developed Index) from June 22. ART has outperformed the other hospitality trusts this year, declining by 18%.
