REITs – CIMB

Ripe for the picking

• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.

• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.

• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.

• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.

• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.

Link – Table