In addition, with a heightened emphasis on decarbonising portfolios to “enhance future asset attributes”, the analysts are expecting S-REITs to shift towards more active recycling to improve portfolio yields and extend their growth trajectory.
“While this is not a new strategy, with industrial S-REITs leading in portfolio reconstitution, we see more adopting this approach to realize value, deleverage and reset onto a growth path,” the analysts write.
At this point, while it is less than optimal for most S-REITs to pursue accretive acquisitions due to the current cost of capital (debt and equity), the analysts think this could change in the near future.
“Instead of depending on the unpredictable capital markets, we see an opportunity for S-REITs to capitalise on the ‘pricing gap’ between private and public markets for their physical assets,” writes the team.
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According to them, embarking on a more active asset recycling strategy offers multiple benefits.
Firstly, it helps demonstrate that asset values are realisable in the market, reassuring financial standing and net asset values (NAVs). Secondly, it enables the use of proceeds for deleveraging and reinvestment in new acquisitions to future-proof portfolios, and lastly, it reduces the investor perception that managers prioritise assets under management over distribution per unit (DPU) growth.
A more active asset recycling strategy will enable S-REITs to reduce their dependence on the uncertainties of financial markets, leading to a more sustainable growth path, the analysts add.
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With the average gearing of S-REITs sitting at around 38.5%, the team of analysts see room for improvement.
They explain: “Based on our calculations, if S-REITs divest around 3% to 5% of their asset base at book values, it could result in an around 2% to 3% percentage point (ppt) reduction in gearing and increase debt-funded capacity by up to $1.2 billion, with potential for improved distributions.”
Presently, Lai, Wong, Tan and Tan are keeping their strategy of focusing on “value” over “safety” for S-REITs. The analysts like the sector, which is currently trading at 0.8 times price-to-book (P/B) and an FY2024 yield of 7.0, or a yield spread of 4.0%.
Among the sub-sectors, the analysts prefer retail over office, office over hotels, and hotels over industrials, with the top three picks being Frasers Centrepoint Trust (FCT), Mapletree Asia Commercial Trust (MPACT) and Lendlease Global Commercial REIT (LREIT).
“From a tactical perspective, markets could re-rate selected commercial S-REITs such as LREIT, CapitaLand Integrated Commercial Trust (CICT), Suntec REIT, and hotel REITs such as CDL Hospitality Trusts (CDLHT), CapitaLand Ascott Trust (CLAS), Far East Hospitality Trust (FEHT) and Frasers Hospitality Trust (FHT) if they embark on a more active asset monetisation strategy,” writes the team.
Calls and target prices
For office S-REITs, the team at DBS has a “buy” call on CICT, MPACT and OUE Commercial REIT (OUECT) at respective target prices of $2.30, $2.00 and 35 cents, while they have a “hold” call on Suntec REIT at a target price of $1.15.
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As for the retail space, the team also has “buy” calls on FCT, LREIT, Paragon REIT, Starhill Global REIT (SGREIT), at respective target prices of $2.70, 90 cents, $1.05 and 68 cents. Likewise, the team has “buy” calls on the overseas retail REITs of CapitaLand China Trust (CLCT) and Sasseur REIT at target prices of $1.05 and $1.00 respectively.
On hotels, ARA US Hospitality Trust (A-HTrust), CLAS, CDLHT, FEHT and FHT have all received a “buy” call across the board, at respective target prices of US 40 cents (54 cents), $1.30, $1.45, 80 cents and 62 cents.
The team at DBS are equally positive on industrial S-REITs, with “buy” calls for AIMS APAC REIT (AA REIT), CapitaLand India Trust (CLINT), CapitaLand Ascendas REIT (CLAR), Daiwa House Logistics Trust , Digital Core REIT, ESR-LOGOS REIT (E-LOG), Mapletree Industrial Trust (MINT) and Keppel DC REIT (KDC REIT), at target prices of $1.60, $1.15, $3.25, 75 cents, US 75 cents ($1.01), 34 cents, $2.60 and $2.20 respectively.
In the healthcare sector, Parkway Life REIT and First REIT have also received “buy” calls from the team of analysts, at respective target prices of $4.50 and 30 cents.
With US office REITs, Keppel Pacific Oak US REIT (KORE) and Prine US REUT have both been given “fully valued” calls at target prices of US 10 cents (14 cents) and US seven cents (nine cents) respectively, while Manulife US REIT (MUST) has a “hold” call at a target price of US 10 cents.
Lastly, in Europe and the US, the team has a “buy” call on Cromwell European REIT (CEREIT) at a target price of EUR 2.00 ($2.91), while IREIT Global (IREIT) and Elite Commercial REIT both have “hold” calls at respective target prices of 44 cents and GBP 28 cents (48 cents).
