Extending TALF loans to commercial mortgage-backed securities (CMBS). The Federal Reserve announced on 1 May that CMBS would become eligible collaterals for Term Asset-Backed Securities Loan Facility (TALF) starting Jun 09. TALF loans with five-year maturities will also be made available for purchases of CMBS, asset-backed securities (ABS) backed by student loans and small business loans. Up to US$100b of TALF loans could have five-year maturities, which are more suited for investors in CMBS. The CMBS market has rallied with yield for AAA-rated CMBS falling from 15% to 10%.
OVERWEIGHT REITs. The US Federal Reserve's decision to extend TALF loans for CMBS will restart the CMBS market, an important source of funding for REITs. Current yield spread for REITs is 4.7%, much higher than the historical average of 3.0%. We expect the yield spread to contract due to normalisation in the credit markets.
We like laggards such as Ascendas REIT (BUY/S$1.55/Target: S$1.93) and CDL Hospitality Trusts (BUY/S$0.755/Target: S$1.24). We also have BUY calls for Ascott Residence Trust (BUY/S$0.675/Target: S$0.90), Frasers Centrepoint Trust (BUY/S$0.80/Target: S$1.44) and K-REIT Asia (BUY/ S$0.89/Target: S$1.15). We have downgraded CapitaCommercial Trust (HOLD/S$1.12/Target: S$1.14) to HOLD as the stock has rallied 64.7% since 18 Mar 09.
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