S-REITs - 1H11 performance round-up (OCBC)

Overweight

Industrial REITs - stability from positive reversion and longer lease structures. The three industrial REITs under our coverage reported 1HCY11 results which were largely within our expectations. Some of the common themes we noted were 1) contribution from new acquisitions, 2) continued high occupancy rates, and 3) positive rental reversions. Ascendas REIT (A-REIT), Cache Logistics (Cache) and Mapletree Logistics Trust (MLT) had annualised implied yield of 6.2%, 9.0% and 7.7%, respectively, based on their latest reported quarterly DPU and last closing prices. As at 30 Jun 2011, both A-REIT's and Cache's leverage was below 30% (28.7% and 28.5% respectively), while MLT's gearing of 40.6% was within management's medium-term target range of 40%-50%. In light of possible headwinds from the current macroeconomic uncertainty, the relatively longer lease structures of industrial REITs could provide some level of stability to unitholders. Our preferred pick in this space is Cache [BUY, fair value: S$1.06] at a relatively attractive FY11E yield of 8.5%.

Office REITs - prefer Grade A exposure. The 1H11 performance of office REITS under coverage (CCT, FCOT and Suntec) were largely in line with expectations. Overall, occupancy rates stayed healthy (CCT: 97.7%, FCOT: 97.6%, Suntec: 99.1%), while we expect negative rental reversions to continue in 2H11 with inflection points ahead in FY12. As of end Jun11, leverage levels remained below long-term targets (CCT: 26.9%, FCOT: 37.1%, Suntec: 38.5%), though we expect CCT and Suntec to gear up further with the Market Street office project and an increased stake in Suntec Singapore, respectively. We continue to prefer CCT for its exposure to domestic Grade A space which is likely to enjoy continued tailwinds underpinned by a flight to quality office space and an increasing rental spread between Singapore and Hong Kong. Maintain BUY on CCT with fair value estimate of S$1.67.

Retail REITs - Orchard supply to ease ahead. CapitaMall Trust (CMT), Frasers Centrepoint Trust (FCT), Starhill Global REIT (Starhill) reported 2Q11 results that were within expectations. In this space, we prefer Orchard retail exposure over suburban malls with the supply of Orchard retail space expected to ease into FY12. We continue to see managers carry out asset enhancement works - CMT (The Atrium, Junction 8), FCT (Causeway Point) and Starhill (Wisma Atria) - which would be the main driver for performance uplifts ahead, in our view. We prefer Starhill for its Orchard retail exposure (Wisma Atria and Ngee Ann City). Maintain BUY with fair value estimate of S$0.70.