REITs – OCBC

Class gap implies different valuation catalysts

Class gap between S-REITs. Consensus forward yields, ranging from 7- 38%, are showing a wide divergence in valuations across the S-REIT sector. Our thesis is that the S-REIT sector is now broadly segregated into two camps – the “haves” (large, blue-chip sponsored REITs with strong balance sheets) and the “have-nots” (smaller, non-sponsored REITs with high gearing). Valuation catalysts also vary accordingly – we believe the market focus for the weaker “have-nots” is still on their ability to secure refinancing but the focus for the “haves” is on 1) how the macroeconomic picture affects earnings and 2) the need for equity issues to recapitalize balance sheets. Investors can expect some key data points on both the refinancing and the earnings fronts in the coming months.

Refi news impacts “have-nots” more. MacarthurCook Industrial REIT [NOT RATED] announced yesterday that it has received a 60 day extension for its loan facility worth S$220.8m maturing on 18 April. MI-REIT is geared at almost 40% and this facility constitutes the bulk of its borrowings. The extension buys MI-REIT some time to continue negotiations with its lenders, National Australia Bank and Commonwealth Bank of Australia. Its inability to secure a resolution by April is a disappointment, in our view. MI-REIT’s refinancing efforts will likely be benchmarked against the Dec 2008 refinancing completed by peer Cambridge Industrial Trust [NOT RATED] as both S-REITs are relatively smaller, non-sponsored and industrial focused. We expect negative refinancing news to further widen the valuation gap between the two S-REIT classes. For the broader sector, such refinancing news may be indicative of lender risk appetite. Tighter loan-tovalue demands may trigger a sector-wide overhaul of capital structures, potentially via equity issues.

Watch rents & vacancy data points for the “haves”. Most S-REITs should report 1Q CY09 earnings over the last two weeks in April. We believe that 1H09 earnings are worth watching as the impact of macroeconomic events slowly filters through to the S-REIT bottom-line. For the office sector, we will be watching the pace of the decline in achieved rents as well as any change in occupancy levels. Given the economic slowdown, occupancy levels will be the key metric to watch in the industrial space. We are also looking out for an update on the post-CNY retail landscape and validation of the consensus ‘suburban means defensive’ view. We maintain our NEUTRAL call on the sector and leave our estimates and ratings for individual S-REITs unchanged in anticipation of 1Q results.

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