SREIT – UOBKH

Accumulating bargains after steep correction

Correction was fast and furious. Share prices for Singapore REITs have corrected 6-7% over the past four days. Large cap REITs bear the brunt of selling with steep correction for CapitaCommercial Trust (-7.1%), CapitaMall Trust (-7.5%), Ascendas REIT (-4.1%) and CDL Hospitality REIT (-7.2%). Frasers Centrepoint Trust also fell 6.8%. MacQuarie Meag Prime REIT, KREIT Asia and Parkway Life REIT were relatively unchanged.

On average, the magnitude of correction was in line with the quantum in cut to our target prices. Average distribution yield for Singapore REITs is 5.5%, in line with five-year average. Average yield spread above 10-year government bond at 2.2% is below five-year average of 2.5%.

Lock in the yields. While markets will continue to be shaken by twin fears of inflation and higher interest rates, we are starting to see value in some of the REITs. We have selected a diversified basket of three REITs, Frasers Centrepoint for retail, CapitaCommercial Trust for office and Ascendas REIT for industrial.

Frasers Centrepoint Trust (BUY/S$1.24/Target: S$1.55)

• FCT focuses on suburban retail malls, which provide defensive qualities. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m in 2QFY08, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08.

• Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is expected to obtain temporary occupation permit (TOP) by Aug 08 and is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with net lettable area (NLA) of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.

• FCT provides attractive FY08 distribution yield of 6.24%, a spread of 2.55% over 10-year government bond.

Ascendas REIT (BUY/S$2.34/Target: S$3.00)

• A-REIT has benefitted from strong demand for suburban office space as Business & Science Park accounted for 25% of its portfolio by property value. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.

• A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a well-diversified tenant base of over 790 international and local companies.

• A-REIT provides attractive FY08 distribution yield of 6.88%, a spread of 3.19% over 10-year government bond.

CapitaCommercial Trust (BUY/S$2.08/Target: S$2.63)

• CCT owns nine properties in Singapore with 2.3m sf of office space (excluding Wilkie Edge and One George Street), which accounts for 7% of private office stock within Downtown Core. CCT is well positioned to benefit from positive rental reversion as 29.4% of leases for office space are up for renewal in 2008 and 2009.

• Market Street Car Park and Golden Shoe Car Park is strategically located at the heart of Raffles Place and represents latent potential to be redeveloped into Grade A office towers.

• CCT trades at a 25.4% discount to book NAV of S$2.79/share.

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