REITs – DBSV

S-REITs still a growth story

• No surprises in 4Q10 results; weaker earnings from Office REITs

• Hospitality REITs offer strongest organic growth while Industrial & Sponsored REITs have portfolio growth visibility

• BUY FCT, P-Life, Cache, MLT, CDL HT

S-REITs collectively delivered 11% y-o-y distribution growth in 4Q10. 4Q10 results were a continuation of the strong showing in 3Q10 with the sector reporting topline, net property income and distributable income growth of 10%, 13% and 11% respectively. Hospitality REITs continued to outperform with strong organic driven growth while acquisitions completed during the course of 2010 lifted distributions for the remaining S-REITs. While retail & industrial S-REITs continue to deliver single digit growth, Office REITs reported weaker results both y-o-y and q-o-q, as passing rents remained below the peak rents signed in 2007-2008. We expect this trend to continue in the coming quarters, only to reverse in 2012.

The forward picture – Growth strongest in Hospitality REITs. We believe that S-REITs are good inflation hedges given their ability to grow rental income above inflation, which is expected to average 4.2% in 2011. Except for office REITs, which could see topline pressure in 2011, S-REITs generally are forecasted to deliver FY10-12F DPU CAGR of 5.5%- 9.2%, which is above inflation. We maintain our view that Hospitality REITs will continue to exhibit the strongest earnings potential (+9.2% FY10-12F CAGR, +5ppts above inflation) stemming from expectations of strong tourists arrivals in 2011. CDL HT (BUY, TP S$2.30), with over 82% of its income from its Singapore hotels, remains our pick to leverage on the robust growth from this sector. In addition, P-Life REIT (BUY, TP S$1.90) offers downside protection as higher inflation bodes well for rental reversions going forward.

Industrial & Sponsored REITs have potential for further accretive acquisitions. Acquisitions will likely feature in 2011 given the current low interest cost environment and relatively low leverage of S-REITs of 34%. In fact, since the beginning of 2011, cS$880m worth of deals have been tied up by S-REITs. We prefer S-REITs with ability to grow accretively and believe that the Industrial REITs and Sponsored REITs can deliver on this front. We like MLT (BUY, TP S$1.07), Cache (BUY, TP S$1.11) and FCT (BUY, TP S$1.73) given their visible pipelines from their respective sponsor, which could be tapped in the medium term.