Industrial REITs to face limited refinancing risks in 2012

They posted robust quarterly results as at end December 2011, and DBS expects stable performance going forward.

Here’s more from DBS:

Healthy quarterly results.
Industrial REITs continued to turn in encouraging sets of results for the financial quarter ended Dec 2011, in line with our expectations. Robust YoY growths of 4.3-14.4% in NPI and distributable income were registered across the REITs, driven by acquisitions, completion of development projects and positive rental reversions. On a QoQ basis, we observe that the REITs also delivered modest growth in their DPUs, as they continued to benefit from better operating performances and contributions from their recent acquisitions.

Expecting stable performance.
Going forward, we believe industrial REITs are likely to maintain their financial performances. While the uncertain global economic outlook and seventh consecutive monthly contraction in the manufacturing sector have likely caused industrial REITs to set more cautious tone on their outlook, we note that all the REITs have already been taking proactive measures to limit any negative impact from a potential market downturn.

Financial position still healthy.
A look at the industrial REITs’ operating performances also shows that their portfolios are still healthy thus far. As at 31 Dec 2011, the aggregate leverage for the industrial REIT subsector averaged at 34.6%, up by a slight 1.9ppt QoQ. However, industrial REITs are in a markedly better financial position now, in our view. Average subsector interest cover was maintained at a strong 6.3x, while borrowing cost of 3.1% was lower than the rates seen during the credit crunch.

Maintain OVERWEIGHT view.
For 2012, we note that only an estimated low S$276.6m (4.5%) of the industrial REIT subsector borrowings are due to expire. This translates to limited refinancing risks for the REITs. We are
maintaining our OVERWEIGHT view on the industrial REIT subsector, as we believe fundamentals are still sound and financial performances are expected to stay resilient. CACHE remains our preferred pick, due to its relatively more robust portfolio, healthy aggregate leverage and attractive FY12F DPU yield of 8.9%.