Industrial REITs – OCBC

On stronger footing

Stronger balance sheets. The industrial REIT sub-sector is in much a stronger position, in our view, compared to a year ago. REITs including A-REIT, Mapletree Logistics Trust, AIMS AMP Capital Industrial REIT [AAREIT, NOT RATED] and Cambridge Industrial Trust [NR] have all raised fresh equity within the past year or so. The sub-sector is on average geared at 33.5% debt-to-assets versus the broader S-REIT average of 30.6%. While the level of debt has decreased generally, there are still pockets of industrial REITs with higher leverage. Leverage levels range from 25% (Cache Logistics Trust, NR) to 42.6% (Cambridge).

Expecting some stability. The managers for the most part presented a cautiously optimistic outlook going forward – both in terms of a bottoming out of asset values and of rents. This is in line with the expected GDP growth of 7-9% in Singapore this year. Colliers expects the recovery in the exports and manufacturing sector to “support an expansion in demand from manufacturers”. This, along with the return of institutional funds, could drive “rents, land and capital values of singleuser factories and warehouses [up] to 10 percent in the next 12 months”. The demand-supply picture varies by asset type, but we do expect a stable-to-positive year for rents and asset values this year, barring significant shifts in the economic environment Big growth plans. Acquisitions are back on the table with transactions worth S$1.25b done in the last seven months; we could potentially see MLT, A-REIT and Cache grow their portfolios further. Balance sheet strength and ability to access capital competitively remains the key sticking point. The subsector has also indicated a new focus on development projects, which has been A-REIT’s domain until now. Asset enhancements and divestments appear to be popular strategies as well.

Valuation. In terms of forward yield, industrial REITs trade at a premium of 100 basis points to the broader sector. Interesting, industrial REITs are actually trading at a lower 5% discount-to-book versus 13% for S-REITs on average. There is significant divergence in valuations within the sub-sector: while A-REIT is trading at a 22% premium to book value, on the other extreme, AAREIT trades at a 32% discount to book. We think this is partially because of continued investor caution towards smaller industrial REITs. Nevertheless, if second-tier industrial REITs can present two to three quarters of sustained earnings performance and deliver on their strategic plans, we could see the valuation gap narrow. We have a NEUTRAL rating on the broader S-REIT sector.