Looking for DPU growth among the REITs
Mervin Song, REITs and property analyst at JP Morgan, has an interesting view on REITs’ valuations. He uses Mapletree Logistics Trust (MLT) as a sort of benchmark. MLT reported a 1% y-o-y rise in distribution per unit (DPU) to 2.065 cents for the October to December quarter, its 3QFY2021. That translates into an annualised DPU of 8.26 cents, and a yield of 4.17% based on the price of $1.98. MLT’s net asset value as at Dec 31, 2020, is $1.28, giving a price/NAV of 1.54 times.
In a recent report, JP Morgan has a preference for retail and hospitality REITs among the REITs because of the Phase Three reopening, a cyclical recovery, the probability of herd immunity through a vaccination programme, and strong double-digit DPU growth for this year and next. Office REITs get an “underweight” from JP Morgan because of continued work-from-home (WFH) trends. As a result, its top picks among the REITs are CapitaLand Integrated Commercial Trust (CICT) for idiosyncratic reasons, and Frasers Centrepoint Trust for its resilient suburban malls.
MLT has an advantage over all the other REITs because of its size, sector, cost of capital and ability to grow. “MLT is having a tailwind because of its logistics portfolio, and 70% to 80% of the portfolio has in-built rental escalations of 1% to 3%,” Song observes. “If there is the same yield [as MLT’s] for different exposures, we would prefer logistics exposure as we prefer logistics ahead of retail and office.”
MLT, Ascendas REIT have DPU growth baked into portfolios
In 2020, MLT raised some $600 million to partfund around $1 billion of acquisitions. The transaction raised MLT’s units in issue by 12.7% y-o-y as at Dec 31, 2020. However, the full impact of the properties’ net property income (NPI) and distributions are only likely to accrete through the course of the current calendar year and MLT’s FY2021 and FY2022 (the REIT has a March year-end).
“MLT has a tailwind from ecommerce. Low yields helped them to buy properties and cost of equity was low. The driver is a combination of low 10-year bond yields and the ability to acquire properties to on an accretive basis to accelerate DPU growth, and this is unique to industrial REITs. We call it a virtual positive cycle,” Song explains.
Separately, Ascendas REIT raised equity in 2020 to the tune of $1.19 billion for acquisitions that were completed either late last year or this year. Last year, Ascendas REIT made $973 million of acquisitions in 2020, of which $768 million was completed in November 2020. An Australian suburban office, which cost $284 million, was completed in January 2021. The market is awaiting the completion of a data centre portfolio in Europe. In an announcement last year, Ascendas REIT had said that $614 million out of the $1.19 billion raised is earmarked for the data centre portfolio. Based on a loan-to-value of around 50%, that would put the data centre portfolio at around $1.2 billion.
All these transactions are likely to boost Ascendas REIT’s DPU this year. In 2H2020, Ascendas REIT’s DPU fell by 0.9% y-o-y to 7.418 cents. FY2020’s DPU fell by 6.1% to 14.688 cents, largely because of a 13.6% rise in the number of units in FY2020 versus FY2019. This was mainly attributed to the placement and equity fund-raising that was completed in November 2020.
The case for CICT
Similarly, Song believes that NPI growth is baked into CICT’s portfolio. Retail REITs could automatically benefit from the absence of rent relief given to tenants. “There will be 21% DPU growth for CICT for 2021 because of a low base and the absence of rental waivers,” Song reckons. “For 2022, we project 10% growth from three factors: commencement of the WeWork lease, the opening of CapitaSpring, and the completion of the AEI [asset enhancement initiative] at 6 Battery Road. That should give you growth despite pressure on office and retail rents.”
CICT’s DPU fell by 27.4% to just 8.69 cents in FY2020 on the back of a stressed retail sector, some $158 million of tenant relief, and an expanded unit base. CICT – the former CapitaLand Mall Trust – had to issue 2,780.6 million new units.
Asset enhancement works on the former HSBC Building, now 21 Collyer Quay, complete in 3Q2020, and a WeWorks lease starts. CapitaSpring, in which CICT holds a stake, is expected to be completed by the end of this year, and asset enhancement works at 6 Battery Road will also be completed by then.