REITs – DMG
S-REITs: High But Not Dry, Cherry Picking The REITs (Overweight)
Respectable latest quarter operating performance, with robust DPU growth from the Office segment. Virtually all S-REITs have released their last quarter results. The sector as a whole chalked up a respectable 24.3% YoY and 6.4% QoQ gain in topline to S$777.0m, with NPI chugging along a similar direction, +24.6% YoY and +4.7% QoQ to S$566.4m. Sequentially, the Retail segment posted the highest growth in both topline and NPI, climbing 9.0% and 5.6% respectively. On a YoY comparison of the two metrics above, the Industrial, Office and Hospitality segments all notched a healthy 20 – 30% improvement. On the back of robust rental reversions, the Office segment was the quarter’s star performer, clocking a 46.1% YoY and 11.4% QoQ increase in DPU, outperforming that of the total DPU growth for the entire S-REITs sector, which measured a 23.0% YoY and 4.7% QoQ improvement.
Growth from within, earnings momentum to roll over into 2H08 and 2009. As a result of lease agreements which are typically signed for two to three years, most S-REITs should have already locked in their earnings at least until 2H08 and 2009, with some even beyond that, from our view. Coupled with 1H08 renewed leases contracted at significantly higher rates, we reckon that earnings momentum should continue into the next 1.5 years. For investors looking into high DPU growth potential for the current year, some of the REITs to watch out for include CDLHT (+24.7%) and MI-REIT (+21.0%). As for the subsequent year, two REITs which have the most DPU upside potential are CCT (+25.6%) and Suntec REIT (20.7%). Essentially, the core component of growth would be organic in nature.
Improved debt profiles and manageable financing costs for now, but refinancing concerns present themselves beyond 2008. The continued credit crunch notwithstanding, most S-REITs have managed to refinance their respective debts, as well as prolonging their debt expiry profiles. Aside from AiTrust, Fortune REIT and LMRT, we estimate that all-in-cost of financing for the remaining 17 S-REITs range from 2.5 – 4.0%, which is relatively healthy, from our angle. Aside from softening short-term interest rates, we believe this is also helped by the REIT managers’ prudent capital management skills. Additionally, the ability for S-REITs’ operating earnings to service their debt obligations remains strong, with virtually all of them having an interest coverage ratio of over 3X. However, as capital markets should continue to remain tight in 2009, or at least in 1H09, this spells heightened difficulties for REITs which need to refinance a major amount of debts due in 2009, including CDLHT, Allco REIT, MI-REIT, CIT, CCT and CMT.
Remain OVERWEIGHT on REITs sector, Suntec REIT as top pick. With unrelenting headwinds facing the property developers (-35.6% YTD), we continue to place our faith in SREITs for their earnings visibility, stable cash flows and defensive nature. Valuations have become more attractive, with the sector trading at a P/B of 0.82x. Further, the recent sector-wide correction of share prices and softening interest rates have led to S-REITs trading at 7.3%, representing a premium of 420 bps over 3.1% of 10-yr bonds. However, we believe that not all is nice and dowdy within the S-REITs space, and now is the ripe time to cherry pick. We prefer SREITs with robust organic boosters and resilient share price performances, namely Suntec REIT (Target price of S$1.87). For more risk-averse investors, we recommend Cambridge Industrial Trust (Target Price of S$0.79), which possesses long average lease tenures with built-in stepped up rentals.
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