By Meenal Kumar
Thu, 4 Mar 2010, 09:21:46 SGT

Five out of the eight S-REITs under our coverage reported 4Q CY2009 earnings in line with our estimates. The remaining three – A- REIT, Mapletree Logistics Trust (MLT), and CapitaCommercial Trust – beat our DPU estimates. In the past two months, the S-REIT sector has announced a sizeable S$1.2b worth of acquisitions. These have primarily been funded on the back of proceeds from equity issues completed in 2009 and 2010. We expect REIT managers to continue down the acquisition path with stressed opportunities emerging as the broader market deleverages and with investors demanding yield growth. In turn, this growth push is likely to require further equity issues due to increased leverage conservatism. In a volatile market, we believe yield is an increasingly important contributor of overall return. Greater visibility may also drive further price-to-book compression. We upgrade our view to OVERWEIGHT from NEUTRAL. Our top picks are Ascott Residence Trust [BUY, FV: S$1.38] and Suntec REIT [BUY, FV: S$1.44]. Key risks to our thesis are macro-economic risk, interest rate hikes and an uncertain policy climate.

4Q CY2009 results review. Five out of the eight S-REITs under our coverage reported earnings in line with our estimates, with quarterly DPU differing 0-4% from our estimates. A- REIT, Mapletree Logistics Trust (MLT), and CapitaCommercial Trust (CCT) beat our DPU estimates by 9%, 9.5% and 17.5% respectively.

Significant activity year-to-date. In the past two months, the S-REIT sector has announced a sizeable S$1,218m worth of acquisitions. These have primarily been funded on the back of proceeds from equity issues completed in 2009 and 2010. K-REIT [NOT RATED] and CDL Hospitality Trusts [NR] made their maiden foray outside of Singapore into Australia. We believe this was primarily motivated by a search for value – distressed or even stressed opportunities are currently more plentiful in regions such as Australia and Japan vis-à-vis Singapore. Meanwhile, CCT agreed to divest Robinson Point for S$203.3m or roughly S$1527 per square feet of net lettable area to a private real estate fund. It also announced it was exploring options to re-develop Starhub Centre and change its use to a mix of residential and commercial. The equity market was also active with Frasers Centrepoint Trust raising S$182.2m to fund the purchase of two retail malls from its sponsor. ARA Asset Management [NR] and CWT Ltd [NR] also announced plans to launch a new logistics REIT. We expect REIT managers to continue down the acquisition path with stressed opportunities emerging as the broader market deleverages and with investors demanding yield growth. In turn, this growth push is likely to require further equity issues due to increased leverage conservatism.

Upgrading sector view. In a volatile market, we believe yield is an increasingly important contributor of overall return. Greater visibility may also drive further price-to-book compression. Ascott Residence Trust continues to be one of our top picks as a proxy to corporate investment and travel. We replace MLT with Suntec REIT as our second top pick on Suntec’s often over-looked retail portfolio and a possible shift in sentiment towards office REITs on increasing leasing activity, active supply management, and a slowing rate of decline in office rents. MLT continues to be a viable investment option, in our view, for investors seeking yield and stability. We upgrade our view on S-REITs to OVERWEIGHT from NEUTRAL. Key risks to our thesis are macro-economic risk, interest rate hikes (more of an issue for big caps REITs that have re-rated strongly, in our view) and an uncertain policy climate (the easy liquidity regime has to end at some point).