In this second part of the series, we dive into two REITs that have been singled out as REITs with a strong DPU growth profile.
Investors Takeaway: 2 REITs To Add The Growth Element To Your Portfolio
- Keppel REIT
While Keppel REIT showed good momentum in 1Q19, it still fell short of consensus forecast. The impact of occupancy changes, weaker Australian dollar and lower contributions from Ocean Financial Centre led to a 2.1 percent year-on-year decline in distribution per unit (DPU). As a result, DPU fell short of market expectations, despite firm conditions in the Singapore office segment.
That said, rising office rent and positive firm leasing momentum amid tight supply should underpin future earnings for the REIT.
Keppel REIT has also announced its proposed acquisition of T Tower in South Korea. The transaction will help Keppel REIT to diversify its prime commercial portfolio beyond its Singapore and Australia market. It will also raise the freehold portion of Keppel REIT’s portfolio to 20.6 percent and committed occupancy to 98.8 percent.
UOBKH also likes the fact that the expansion into South Korea will enhance income stability thanks to the different stages of the property cycles in the respective markets. Furthermore, South Korea’s office market has a robust outlook with office investments reaching a historical high in 2018 amidst ample liquidity and positive investment sentiment.
UOBKH notes that Keppel Capital’s strong presence in South Korea with ownership in central business district’s commercial offices like Seoul Square, Jongno Tower, Pacific Tower, and Center Place will allow Keppel REIT to leverage on its sponsor’s strength to source for further growth opportunities in the Seoul office market.
1Q19 Performance Rating: B-; BUY, TP $1.37
- Mapletree Commercial Trust
Mapletree Commercial Trust ended FY19 in a good showing in 4Q19 with both gross revenue and net property income growing at close to four percent year-on-year. The growth came from a better performance from VivoCity, Merrill Lynch Harbourfront (MLHF), PSA Building (PSAB) and Mapletree Business City I (MBC I).
In particular, VivoCity was the star performer where it achieved a three percent improvement in FY19 gross revenue on the back of positive rental reversion and effects of step-up rents.
With a changeover expected to complete in 2Q19 (following Giant’s exit), the new speciality space portion is expected to generate a 40 percent ROI, according to CIMB. This will underpin Mapletree Commercial Trust’s earnings outlook in FY20 and also drive the likelihood of positive rental reversion when leases expire in FY20 and FY21.
Moving forward, CIMB is confident that Mapletree Commercial Trust will continue to deliver DPU growth, driven by asset enhancement activities at VivoCity and positive rental reversion. The Trust is also in a strong position to consider inorganic growth opportunities.
1Q19 Performance Rating: A-; BUY, TP $2.03