SREITs – OCBC

Guidance could diverge at 2Q10 results

Strong economic numbers at home. Singapore is likely to become Asia’s fastest-growing economy this year
on the back of increasing tourism numbers, rising employment, and strong manufacturing numbers. Economists are increasingly turning positive on Singapore, with their GDP estimates now trending on the upper end of, or even higher than, the official Ministry of Trade & Industry estimate of 7-9% growth for 2010. The median forecast, according to Bloomberg, for real GDP growth this year is 10.65% with estimates ranging from 9.7% to 13%.

Guidance could diverge at 2Q10 results. Singapore’s strong growth numbers are being achieved against a backdrop of moderating global growth. Mixed economic data in the US and the threat of fiscal austerity measures being employed to address sovereign debt worries in Europe could portend sluggish global economic growth in 2H10. While Singapore is also vulnerable, dynamics at home are still going strong. As such, we believe we may see a divergence in guidance given by REIT managers as Singapore-listed REITs begin reporting 2QCY10 earnings from this week onwards. This divergence could be driven by the degree of the REIT’s exposure to Singapore versus other economies. Multi-geography REITs, in our view, could be quicker to adopt a cautious tone on the outlook for earnings performance this year. In contrast, Singapore-skewed retail or industrial REITs may report stronger guidance and/or more aggressive growth plans.

Focusing on value. We remind investors that while market attention has been on a correction, the FTSE REIT index is, in fact, up 2.3% year-to-date at 632.16 points – a gain of 126% against its March 2009 low. Valuations for several REITs, especially the larger cap plays that are trading at a significant premium to book value, are increasingly looking fairly priced, in our opinion. As such, we are maintaining our NEUTRAL view on the S-REIT sector. We prefer mid-to-large cap REITs that have a stable-to-positive earnings outlook, strong balance sheets, and that are still trading at attractive yields and discounts to book value. Under these criteria, we like Starhill Global REIT, which trades at a 30% discount-to-book and derives some 60% of its gross revenue from Singapore where it holds stakes in Wisma Atria and Ngee Ann City. We also like Frasers Centrepoint Trust (FCT), which focuses exclusively on suburban retail in Singapore. At 2Q10 results, FCT is likely to disclose details on the proposed asset enhancement of Causeway Point, which could potentially lift passing rents and income at its largest asset, unlocking value for unitholders.