SREITs – OCBC

Impact of Japan’s earthquake & tsunami

Residential REITs. Saizen REIT (Not Rated), with 146 properties all over Japan, will be the most affected S-REIT, in our opinion. The impacted region includes the cities of Sendai with 22 properties, Koriyama and Morioka with three properties each, making up 15.5% of its portfolio value (PV). Most notably, Sendai (nearest quake epicenter) constitutes 11.2% of Saizen’s total portfolio value and 10.6% of rental income. The full extent of the damage is still unknown as access to these areas has been cordoned off due to safety concerns.

Industrial REITs. MLT has 14 properties in Japan (26.4% of PV) of which 13 escaped with either no damage or minimal damage. Sendai Centre (2-storey chilled and frozen facility, contributing 0.75% of PV & 0.7% of MLT’s gross revenue), is located along the coastal area of Sendai, and appears to be most affected. However, the full extent of damage can only be ascertained when access into the property is allowed. The total cost of reinstating the building is ~S$9m (0.37 S-cents per unit), but MLT does not expect the cost of repairs will come to this amount. We place our BUY rating and fair value of S$1.03 under review pending more updates and clarity from management. AAREIT (Not Rated) also has a warehouse at Saitama (4% of PV) to be sold pending sale completion in Mar 2011. AAREIT has announced that there appears to be no structural damage to the property.

Office REITs. FCOT has three commercial properties in Tokyo and Osaka (6.9% of PV). We understand from the manager that all properties are away from the affected areas and thus did not suffer any damages. With FCOT’s limited exposure in Japan, we maintain our BUY rating and fair value of S$0.92.

Retail REITs. Starhill Global REIT has seven malls in Tokyo (6.6% of PV, 4.6% of total gross revenue). The manager has stated that there is no known damage to the malls. In addition, the properties were also partially covered by earthquake insurance (unlike properties in other REIT subsector), providing some form of assurance for unitholders. We expect retail sales in Japan to be impacted somewhat but maintain our BUY rating and target price of S$0.74.

Taking a cautious stance. Nevertheless, we remain cautious as events in Japan are still unfolding and at this stage, it is hard to predict the extent to which the quake and the nuclear fallout will hurt the economy. There is also the possibility of more quakes (likely 7.0 or higher magnitude), aftershocks and even tsunamis taking place in the coming days.