REITs – OCBC

3Q review and lessons from MI-REIT

Results were largely in line. Most S-REITs under our coverage reported 3Q CY09 results within expectations. CapitaCommercial Trust (CCT) and Ascott Residence Trust (ART) were the sole out-performers thanks to strong gross margins at ART and positive rental reversions at CCT. In November, Mapletree Logistics Trust (MLT) raised S$79.4m from a private placement while Starhill Global REIT [NOT RATED] disclosed plans for S$571.3m worth of acquisitions.

Broader property trends unchanged The pace of rent declines for office space decelerated in 3Q09 but we believe we are approaching an inflection point where spot rents are now trending below the passing rent on expiring leases. Meanwhile, performance of retail REITs under our coverage was  generally stable and we expect earnings to be supported by asset enhancement initiatives and potential acquisitions. Hospitality players reported stabilizing occupancy numbers but continued weakness in room rates. Year-end portfolio revaluations may be a key price driver for industrial REITs in the coming months with MI-REIT [NR] booking a 11.1% fall in asset values versus a March revaluation.

REIT re-structuring continues. Restructuring activity continues in the SREIT space as falling asset values ratchet up leverage. MI-REIT is a perfect case: high leverage; a chunky re-financing deadline; a weak sponsor (MacarthurCook pre-AIMS); and a contracted acquisition committed at peak prices. In the typical modus operandi of S-REIT players so far, control changed hands at the manager level when AIMS Financial Group stepped in. But for the first time, control was also contested at the REIT level with the intervention of Cambridge Industrial Trust [NR]. While its manager’s attempt to control two directly competing REITs was thwarted by the Monetary Authority of Singapore, several key lessons have emerged from this saga for both investors and REIT managers (in our opinion).

Lessons from MI-REIT. First, muted investor reception to the original MIREIT proposal indicates that attempts to restructure REITs through dilutive cash calls and acquisitions of sponsor-owned assets, however necessary, need to be more transparently communicated to the market. Secondly, successful execution of any M&A action at the REIT level is likely to require more careful understanding of the regulator’s position. Thirdly, further distinction needs to be made between the actions of (and the benefit to) the manager versus the REIT. Most importantly, existing investors in REITs with high leverage and weak sponsors need to be wary of the likelihood of potential dilution as more cash calls are likely – we see a better investment opportunity post-capital market activity and post-dilution. Maintain NEUTRAL view on S-REITs.