Despite his positive take on the sector, Chan is careful to note that he remains more selective, preferring REITs with a healthy balance sheet, strong sponsor and improving metrics such as the hospitality and retail sub-sector. “Catalysts are expected from pick-up in the economy and asset recycling,” he writes.
“However, we think it will remain challenging for S-REITs (apart from the hospitality sub-sector) to grow [their] distributions per unit (DPU) with higher borrowing costs and forex headwinds expected,” he adds.
Among the sub-sectors, Chan has indicated a preference for the hospitality and retail sub-sectors due to higher revenue per available room (RevPAR) and the gradual reopening of China. Furthermore, suburban retail offers resiliency in a downturn while downtown retail stands to benefit from the recovery of international visitor arrivals, which will in turn lift tenant sales and sentiment.
In his report dated Oct 16, Chan is “overweight” on the hospitality and retail sub-sectors and is “neutral” on the office and industrial sub-sectors.
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Specific to individual REITs, the analyst’s top picks are CapitaLand Ascott Trust(CLAS) and Frasers Centrepoint Trust(FCT). He has given CLAS an “accumulate” call and target price of $1.20 while FCT, also at “accumulate”, has a target price of $2.35.
“CLAS’s share price has experienced a decline of [around] 10% from its preferential offering price of $1.025, which was undersubscribed at 64.7%, including excess rights. The joint lead managers, bookrunners and underwriters subscribed for the remaining portion that was not subscribed. Together with the $200 million raised through the private placement at $1.043, gross proceeds of $303.1 million was raised from this equity fundraising – 56.1% of which will be used to fund the 1.8% distribution per unit (DPU) accretive acquisition of $530.8 million in assets,” says Chan.
“Considering CLAS’s share price’s post-issue performance in this weak market, we believe REITs will hold off any equity fund-raising plans in the foreseeable future, unless as a last resort to reduce leverage, or a highly promising acquisition opportunity arises,” he adds.
Units in CLAS and FCT closed at 88.5 cents and $2.11 on Oct 19.
