SREITs – DMG

Euphoric aura could further compress yields

Raising target prices on lower cost-of-equity assumptions. We are raising our target prices for S-REITs to account for continued low interest rates. We  lowered our 10-year risk free assumptions by 50bps to 2.5%, resulting in the concomitant reduction in cost-of-equity. CDLHT (BUY/TP: S$2.15) is our top pick for large-cap S-REIT and CREIT (BUY/TP: S$0.64) is our top pick smallcap S-REIT. Sector now trades at FY10 yield of 6.8%.

Supernormal visitor growth of 30% – a real possibility! We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. Amara Holdings, (UNRATED, RNAV: S$0.68-0.75) is another hotel play that could enjoy colossal spin offs from Singapore’s monumental tourism boom.

Prime office rents likely to fall by a further 20% to S$6/sqft. With 3.9m sqft of new office space (5.4% of existing supply) coming on stream in 2010, the market has become so competitive that it is increasingly common for landlords to offer sweeteners such as fitting-out costs to attract new tenants. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT (SELL/TP: S$0.87). Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower
than 3Q09’s figures.

Euphoric aura could see further yield compression. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for the REIT sector. We, however, see minimal upside for CMT and A-REIT (NEUTRAL) as both counters are already trading close to their heyday yields of ~5% and 6%, respectively. We recommend BUY entries for CMT at S$1.55 and A-REIT at S$1.80. We continue to favour Suntec (BUY/ TP: S$1.45) as leasing activities
at Suntec Tower remains buoyant and expiring rents are marginally underrented. Suntec trades at attractive 8.6% yield for FY10.

Interesting small-cap REITs to watch. We believe acquisitions are in the works for FCT (BUY/TP: S$1.53). With a low cost-of-equity, we expect potential acquisitions to be DPU accretive. Cambridge REIT (BUY/TP: S$0.64) has a defensive business structure with an FY10 yield of 11.4%. We believe the stock
is a major laggard to A-REIT, trading at a spread of 4.4%, way above its historical average of 1.4%.

Link – Table