SREITs – OCBC

THE BURGEONING MARKET

• S-REITs continue to perform
  
• Sector currently trading at 1.24x P/B
  
• Prefer S-REITs with strong fundamentals and compelling valuations
  

Firm 1Q13 performance; mostly in line

In our latest assessment of the S-REITs sector, we continue to see familiar trends. REIT managers have generally maintained firm growth in their trusts’ rental income, on the back of contributions from past investments and improved operational performance. Of the 16 SREITs under our coverage, 10 of them reported results that were in line, three exceeded our expectations, while the remaining three fell short of our forecasts.

Leasing activities remained largely healthy

1Q13 operating metrics for most of the S-REITs had stayed resilient. Average portfolio occupancy was stable at 96.9%, whereas the weighted average lease to expiry improved from 4.3 years in 4Q12 to 4.5 years. In addition, positive rental reversions were also clocked. This clearly illustrates the healthy rental market demand and proactive lease management on the part of the REIT managers, in our view.

Active capital management

We also observe that S-REITs have been very active in refinancing its existing debts and maintaining an optimal capital structure. There were a slew of private placements in 1Q, which helped keep the aggregate leverage healthy at 32.1%. Going forward, we believe that the sector’s aggregate leverage is set to trend upwards. As such, SREITs may continue to tap the equity capital market to fund their proposed investments. The cost of debt is expected to maintain at current levels or increase marginally, as S-REITs trade possibly higher interest costs for diversified funding sources, longer term debt, and/or an improvement in their unencumbered asset ratios.

Sector outlook remains sanguine

For 2013, we are maintaining our view that S-REITs are likely to continue to deliver firm performance. All the S-REITs are either involved in asset enhancement initiatives/development projects, pursuing yield-accretive acquisitions, or enhancing their portfolio metrics through active leasing efforts, which should lead to continued strong numbers for their financial scorecards. For our coverage, we expect the S-REITs to post 6.6% growth in aggregate DPU for the current fiscal year, before experiencing another 8.6% growth in the next year.

Prudent to be selective

Nevertheless, the S-REIT index has been enjoying a good run-up, raking up 36.7% gain in 2012 and another 12.7% increase YTD. Given that the S-REITs are now trading at a 24% premium to book value on average, we feel that it is prudent to be selective on S-REITs. We continue to prefer S-REITs with good growth potential, strong financial position and compelling valuations (relatively lower P/B and decent DPU yields). In this respect, we continue to pick CapitaCommercial Trust [BUY, S$1.80 FV], Fortune REIT [BUY, HK$8.64 FV] and Starhill Global REIT [BUY, S$1.05 FV] as our preferred BUYs. Reiterate our OVERWEIGHT view on the broader SREITs sector.