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UOB Kay Hian maintains 'overweight' rating on S-REITs; remains positive on CLAR and PLife REIT

Douglas Toh
·5-min read

UOB Kay Hian has maintained its "overweight" rating on Singapore REITs (S-REITs).

UOB Kay Hian has maintained its "overweight" rating on Singapore REITs (S-REITs) as CapitaLand Ascendas REIT A17u (CLAR) and Parkway Life REIT (PLife REIT)'s 3QFY2023 ended Sept 30 business updates stood in line with expectations.

UOB analyst Jonathan Koh is keeping “buy” on CLAR with a target price of $3.13 following the group’s 3QFY2023 business updates.

CLAR’s portfolio occupancy was stable at 94.5% in 3QFY2023, as its occupancy rate for Singapore improved 0.4 percentage points (ppts) q-o-q to 92.7%, offset by a marginal easing of occupancy rates for the REIT’s Australia and UK-Europe properties by 0.5 ppts and 0.2 ppts q-o-q respectively to 99.0% and 99.3%.

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Koh adds: “Australia and the UK-Europe remain near full-occupancy.”

Furthermore, CLAR recorded positive rental reversion of 10.2% for leases renewed in its multi-tenant buildings in 3QFY2023, with its Singapore properties showing a 9.8% rental reversion rise, its US properties showing an 8.5% rise and its UK-Europe properties showing a 28.8% rise.

The REIT’s logistics properties also registered exceptionally strong rental reversion at 25.5% in Singapore and 28.8% in the UK-Europe due to tight supply and adoption of just-in-case supply chain management.

Notably, CLAR expects positive rental reversion at a high-single digit for the full year of FY2023.

Koh notes in his Nov 2 report that the REIT has completed the acquisition of a two-storey high specification colocation data centre in Watford of North-West London for GBP 125.1 million ($209.4 million) on Aug 17.

The analyst writes: “This is CLAR’s fifth data centre in the UK. Its data centre portfolio will expand 15% to $1.5 billion, representing 9% of its total investment properties. The data centre is 80% occupied by five investment-grade tenants. The acquisition is accretive to pro forma FY2022 distribution per unit (DPU) by 0.7%.”

Meanwhile, the REIT has also embarked on a $107 million redevelopment to transform two blocks of traditional warehouses with cargo lifts at 5 Toh Guan Road East in Singapore into a modern six-storey ramp-up logistics facility.

This redevelopment will utilise the untapped plot ratio to increase granting financial authority (GFA) by 71% to 50,920 square metres and is scheduled to complete in 4QFY2025.

“In total, CLAR has four ongoing redevelopment and convert-to-suit projects (1 Science Park Drive, 27 IBP and 5 Toh Guan Road East in Singapore and 6055 Lusk Boulevard in San Diego, California) worth $600 million to enhance return from its existing portfolio,” notes Koh.

On the REIT’s aggregate leverage, the analyst writes that it has remained healthy at 37.2% as of September.

Koh notes: “Average cost of debt was stable at 3.3%. The debt maturity profile is well-spread with less than 15% of borrowings due for renewal in any single year for the next five years. Interest coverage ratio was healthy at 3.8x.”

Meanwhile, Koh is also keeping “buy” on PLife REIT at a target price of $4.19, with the REIT reporting a DPU of 10.99 cents for 9MFY2023, which is 2.8% higher y-o-y and in line with the analyst’s expectation.

The REIT’s gross revenue and net property income (NPI) increased 24.6% and 26.2% y-o-y respectively in 9MFY2023 due to contribution from five nursing homes acquired in Sep 2022 and higher rent from its Singapore properties under the new master lease agreements that commenced in Aug 22, partially offset by depreciation of the Japanese yen against the Singapore dollar.

Koh writes: “Finance costs surged 110% y-o-y due to funding for capital expenditure (capex) and acquisitions and higher interest rates for Singapore dollar debts. Distributable income normalised to growth of 2.8% y-o-y after straight-line rental adjustment.”

He continues, noting that Singapore hospitals will benefit from the rent step-up of 25.3% in FY2026 after the completion of PLife REIT’s Project Renaissance. The $350 million Project Renaissance, jointly funded by sponsor PREIT whose share in renewal capex is $150 million, as well as IHH Healthcare Q0f, will transform Mount Elizabeth Hospital (MEH) into a modern and integrated multi-service medical hub over three years.

The REIT has also  completed the acquisition of two nursing homes in the Osaka Prefecture, namely HIBISU Shirokita Koendori and HIBISU Suita, for a total consideration price of JPY 1,766.4 million ($16.4 million) on Oct 27.

Koh notes: “The two freehold properties are well-located in residential areas in close proximity to central Osaka City. They have a long average lease term of 29 years. The acquisition was made at 11.9% below valuation and will be fully funded by JPY debts.”

Lastly, PLife REIT’s aggregate leverage is healthy at 36%, as is its low allin cost of debt at 1.32%.

The analyst further notes that its interest coverage ratio is high at 12.8x, and there is no long-term debt refinancing needed till Feb FY2024.

“PREIT adopts a natural hedge strategy for its Japanese investments to maintain a stable net asset value calculation (NAV). About 74% of its interest rate exposure is hedged. It uses JPY forward contracts to hedge JPY income till 1QFY2027,” concludes Koh.

Sector catalysts for the sector include hospitality, retail and office REITs benefitting from the reopening of the economy and easing of Covid-19 restrictions in Singapore and around the region, as well as limited new supply for logistics and retail segments in Singapore.

Units in CapitaLand Ascendas REIT closed three cents higher or 1.12% up at $2.70 today, while units in Parkway Life REIT closed two cents higher or 0.58% up at $3.49 today.

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