Singapore REITs: Sustainable growth (DBSVickers)

· High yield spreads and a strong S$ continue to attract investors to S-REITs

· MCT, FCT, MLT expected to deliver strong earnings growth in coming quarters

· Relative value in smaller cap REITs like Cache and FCOT

S-REITs outperformed benchmarks but still offer an attractive 350 bps over long bonds. Having outperformed the FSSTI and developers by 3% and 13% respectively YTD, S-REITs currently offer a weighted average yield of 5.9%, which remains an attractive c350bps over the long-term government bond. The current high yield spread and a strong S$ will continue to sustain investor interests in S-REITs.

Looking for “positive earnings surprises”. As we approach the upcoming second reporting quarter for 2011, we believe that earnings growth sustainability will remain a key focus. We remain positive that Hospitality S-REITs should continue to deliver strong results, judging by latest statistics posted by the Singapore Tourism Board, but we believe that street has already priced in strong growth expectations. Retail REITs are expected to see positive rental reversions going forward supported by the current positive consumer sentiment. FCT (BUY, TP S$1.73) is expected to deliver a good set of numbers in the coming quarters, as reconstruction works at Causeway Point have passed the most crucial stage, with committed occupancy at over 99%. In addition, the impending purchase of Bedok mall will act as a re-rating catalyst for the stock. MCT (BUY, TP S$1.05) should also see strong reversionary rental growth of c10% in the coming quarters, coming off from a first renewal cycle at its Vivo city retail mall.

Acquisition-driven growth. S-REITs have collectively acquired cS$1.9bn of assets YTD, which should start contributing to earnings in the coming quarters. After two months of relatively flattish DPU, we believe MLT (BUY, TP S$1.07) is poised to deliver a strong uptick in earnings momentum, boosted by recently completed acquisitions.

Value proposition in smaller cap S-REITs. We see relative value amongst certain smaller cap S-REITs. Cache ( BUY , TP S$1.11), which currently offers a yield of over 8.0%, is attractive, backed by transparent earnings structure and armed with a low leverage of 26%, has the headroom to acquire further. FCOT (BUY, TP S$1.05), at a P/BV of 0.6x, is unjustified in our view, given the yield enhancing steps taken by management and plans to re-finance its expiring loans should result in future interest savings.