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3 Turnaround REITs With Improving Fundamentals

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Hospitality, industrial and retail REITs have been facing pressure over the last few quarters due to influx of supply or threat from e-commerce. As the oversupply starts to clear, analysts believe that REITs in these three sub-sectors will recover. Among the retail, hospitality and industrial REITs, CDL Hospitality Trust, Cache Logistics Trust and Fraser Centrepoint Trust have been identified as REITs that are on the cusp of recovery in their respective subsectors.

Investors Takeaway: 3 Turnaround REITs With Improving Fundamentals

  1. CDL Hospitality Trusts

Although CDL Hospitality Trust’s results disappointed over the last two quarters, DBS believes that it is on the cusp of a recovery. The projected recovery in the overall Singapore hospitality market shown in revenue per available room (RevPAR) growing by 3-5 percent p.a. over the next few years should drive share price higher. The current valuation of CDL Hospitality Trust’s portfolio is overly conservative, according to DBS.

In addition, CDL Hospitality Trust recently made its maiden acquisition in Florence, Italy. Given the attractive yield spreads on offer in Europe owing to the low funding costs, the acquisition was a smart way of redeploying capital for CDL Hospitality Trust. Overall, CDL Hospitality Trust should deliver a DPU CAGR of three percent between 2017-2020 given the projected recovery in Singapore hospitality market and its smart acquisition.

BUY, TP $1.85; Current share price $1.48

  1. Cache Logistics Trust

While rental rates are still under pressure due to a huge influx of warehouse space last year, RHB is expecting supply pressures to taper off in 2H18. Based on CBRE data, SG warehouse supply for the next two years is expected to average considerably below the past 5-year average. With supply declining and demand showing signs of picking up, RHB expects pressure on rental rates to slow and start improving by end-2018. As such, Cache Logistics Trust is nearing the tail end of the DPU downcycle.

Amidst a competitive home market, Cache Logistics Trust has been actively diversifying its exposure to Australia over last the few years. The diversification benefits of longer Weighted Average Lease Expiry (WALE), freehold land tenure, inbuilt rent rate escalations and a similar country risk profile are starting to kick in. RHB notes that Cache Logistics Trust’s strategy has been paying off, which will lead to an increase in its share price.

Cache Logistics Trust is currently priced at a FY18/19F yield of more than eight percent, which is significantly higher than S-REITs’ average of 6.4 percent.

BUY, TP $0.84; Current share price $0.695

  1. Frasers Centrepoint Trust

Frasers Centrepoint Trust finished the quarter with results that were largely in line with consensus expectations. Although CIMB expects rental growth to moderate in the near term due to the absence of major asset enhancement initiatives, Frasers Centrepoint Trust’s large suburban malls continue to be a major draw. In the face of structural changes in the industry, its large suburban malls will make it relatively resilient as compared to other mall operators.

The forward outlook for Causeway Point appears to be improving as CIMB forecasts stronger positive rental growth upon the completion of the construction of an underground link from its B1 to Woods Square. Northpoint City North Wing is also expected to continue improving in the coming quarters as a new tenant moves into Yishun 10 Podium. CIMB notes that the potential acquisition of Waterway Point and Northpoint City South Wing from its sponsor could catalyse the REIT in the near term.

BUY, TP $2.35; Current share price $2.18

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