REITs – CIMB

Diversifying funding sources

• Maintain Neutral. SREITs recently raised more than S$900m from capital markets at lower interest rates and longer tenures than a year ago. The opening up of capital markets should be very positive for the REIT sector, particularly as debts maturing in 2011-12 remain chunky. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10. We have not adjusted our interest-rate assumptions for REITs that have announced their refinancing as the quantum of issuance remains rather small and/or is significantly hedged. We maintain our financial estimates, target prices and Neutral position on the sector. Large-cap REITs (AREIT, CMT, CCT) are still relatively expensive and lack near-term catalysts. CDL-HT remains our sector top pick for its low gearing and on the back of our positive outlook for the hospitality industry

• Lower interest rates and longer tenures. Cost of debt has declined 100-150bp from a year ago for 3-year debt. Additionally, almost 90% of the issuances had tenures of 5-7 years, much longer than the standard three years which were available to the sector in the same period.

• Relief for chunky debt maturing this year and funding for acquisitions. The opening up of capital markets should be very positive for the REIT sector in providing a alternative funding source for refinancing and acquisitions. If capital markets remain open, debt maturity profiles for the whole sector could be termed out gradually. REITs seeking to acquire more assets would also have an alternative funding source.

• Medium term refinancing risk still exists. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10.