SREITs – DBS

Upside for Industrial REITS

• Room for earnings upgrade for industrial reits

• Hospitality reits to lead earnings growth in 1Q10

• Prefer industrial, retail and hospitality reits

• Top picks – ART, CDL HT, MLT, FCT, AiT

1Q earnings growth driven by economic recovery and acquisitions. We expect Sreits earnings momentum to continue into 1Q10, led by hospitality reits. Hospitality Reits should grow by at least 10% qoq in 1Q10, owing to a secular sector recovery while industrial reits should enjoy sequential mid single digit earnings uplift from new acquisitions. Retail reits are likely to show modest growth on the back of improving retail sales and office reits are likely to see marginal qoq increase, given the previous high base in rents.

Raising our earnings projection for the industrial Sreits. Looking ahead, we see 3 catalysts for Sreits – organic growth, acquisitions and refinancing into current lower interest cost environment. We have raised our earnings estimates for industrial Sreits by 1.5-4% to factor in potential new acquisitions in FY10. On the operating front, the pick up in economic activity has resulted in increased leasing enquiries, particularly for logistics warehouse, light and hi-tech industrial space. Rental hikes in 1H are likely to remain modest, although we anticipate this trend will be more evident in 2H10. Suburban retail rents have benefited from rising retail sales and a nascent recovery in rental pricing power.

Interest burden to reduce on refinancing options. The present window of opportunity for refinancing exercises at competitive rates have brought our attention to the possible uplifting impact of reduced interest burden on earnings. Potential beneficiaries would include reits with debt refinancing due this year and next such as CCT, CMT, Suntec, K-reit and Starhill Global. This has not been factored into our existing forecast.

Going for alpha. Sreits have outperformed developers YTD and are currently trading at DPU yields of 7.4%. Our 12-month price target translates to a projected yield of 6.5%, or 13% upside from here. Our strategy for Sreits would be to look for alpha, given the outperformance to date. We continue to favour the hospitality, retail and industrial segments, that offers the greatest upside based on our price objectives. Our top picks include CDL HT, ART, FCT, Ascendas India and MLT. The risk to our view is the prospect of rising long bond yields, which could drag on share price performance.