■ 3Q2015 suggests in line to better-than-expected performance
■ Recent themes: overseas acquisitions, perpetual securities and privatisations
■ Preferred picks: CCT, KREIT and FEHT
3Q2015 results suggest in line to better-than-expected performance:
3Q2015 results for SREITs under our coverage suggest in line to better-than-expected performance (mostly given expectations have been low). For the retail sector, tenant sales and shoppers’ traffic continued to improve (now seen for some quarters), while for the hotel sector the pace of y/y deterioration in RevPAR slowed in 3Q (vs. 1H2015). As well, for AREIT’s business parks, reversions at 13.2% were stronger than the 8.3% reversion recorded in the previous quarter though performance of other sub-segments was more mixed. After this results season, we believe the outlook for the office sector remains most uncertain, followed by serviced apartments.
Recent themes – overseas acquisitions, perpetual securities and privatisations:
Overseas acquisitions are a recurrent theme as managers attempt to support DPU/DPU growth, with staples like CDREIT not shy to purchase through the Business Trust portion of the staple. Issuance of perpetual securities supporting acquisitions is likely to pick up as these instruments gain increased acceptance as part of the capital structure. Last, we think the recent SGD517m acquisition of Saizen REIT’s Japanese assets by Lone Star at close to appraisal value (the REIT was trading at a steep discount to NAV prior to the offer) puts focus on privatisation and public-private arbitrage opportunities within the sector.
Preferred picks – CCT, KREIT and FEHT:
Recent sector performance has been largely macro-driven with 10-year SG government bond yields declining c40bps to 2.5%, while spreads have increased c10bps to c400bps (historical average: c360bps) – this is reflected in dividend yields declining from 6.8% to 6.5% (historical average: 5.9%). In our view, bond yields and the direction of SGD vs. major global currencies are likely to dictate the near-term direction of the sector. Our preferred picks are in the economically sensitive sectors of office and hospitality (CCT, KREIT and FEHT), where dislocations with regard to dividend yields, spreads and discounts to RNAV are most acute – we acknowledge the weak outlook, but these are more than priced in, in our view. (Read Report)
Source : HSBC Global Research