CitySpring Infrastructure Trust – Rights issue to raise S$235.2m in gross proceeds

CitySpring announced a fully underwritten, renounceable 1-for-1 rights issue at S$0.48 per rights unit, priced at a 38.5% discount to Thursday’s closing price of S$0.78. Temasek is committed to sub-underwrite up to 32.0% of the rights units, including its pro-rata entitlements of 27.8% of the rights units.

Net proceeds of S$227.5m will be used to repay early part of the S$370m-DBS term loan at the trust-level. With that, the Basslink acquisition is no longer 100% debt-financed. An in-principle approval for a-S$370m revolving credit facility (RCF) from DBS has been received. The RCF is intended to replace the TLF, with only S$142.5m drawn. While the terms are still being negotiated, the manager does not expect the costs to be more onerous than under the term loan.

The manager estimates net savings of S$4.7m p.a., taking into account interest savings, base management fee, and commitment fee for the RCF (but before any upfront fee). Assuming the rights issue had been completed on 1 Apr 09, the pro forma 1Q10 DPU would have been 1 cts per unit compared to the current 1.75 cts.

With a reduced debt-level and a committed RCF, CitySpring will enjoy greater funding flexibility. The manager said that the RCF could be utilized to fund acquisitions, investments in its Basslink telecoms network, or partially fund the S$200m gas network conversion initiative at City Gas, which could begin in 2H10 and take 5 years to complete (announced at IPO).

Assuming that the distribution guidance is unchanged, we estimate post-rights DPU p.a. at 4.0 cts, offering a yield of 6.3% based on the TERP of $0.63. Our ex-rights target price would be $0.70, implying a total return of 17.3%. The frequency of DPU payment remains (quarterly). We maintain our Buy recommendation with a target price of $0.86.

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K-Reit - Positive rental reversions continue

KREIT’s net-property income, up 13.8% QoQ, was 27.7% above our forecast, helped by an easing of property taxes and other expenses.

Top-line growth, up 3.9% QoQ, was also impressive, considering that occupancy for KREIT’s properties (excluding its one-third stake in One Raffles Quay, which was fully occupied) deteriorated slightly to 92%, from 93.4% at the end of March. Even though spot rents continued to fall, KREIT’s lease renewals were still accretive because passing rents increased QoQ for all properties and expanded overall to S$7.11 per square foot/month (from S$6.71 per square foot/month for 1Q FY09).

We have raised our target price to S$1.23 from S$1.03, based on our RNG valuation method, after lowering our effective cap-rate assumption to 5.75% from 6.5%. As with all office S-REITs, we use 2008 core-operating distribution as the basis for our valuation since it captures what we believe is a reasonable mid-cycle passing rent (about S$5.64 per square foot/month for its investment properties).

We have revised up our DPU forecasts by 14.5% for FY09, 6.1% for FY10, and 6.2% for FY11 on higher rental renewal assumptions. We have also lowered our operating expense assumptions and assume that the manager can maintain overall occupancy at 92% for the rest of 2009 before the occupancy falls to an estimated 87% for 2010 due to the addition of new office supply.

We maintain our 2 (Outperform) rating for KREIT because we believe it is one of the few S-REITs that offer value. Our target-price is based on 0.55x on our June 2009 NAV. Even though the manager did not revalue the properties, we believe the debt-to-asset ratio of 27.8% is highly defensive. How attractive KREIT remains will depend on the results of the other S-REITs, in our view.

Starhill Global REIT - Rights issue overkill

We have downgraded our rating for Starhill Global REIT (Starhill Global) to 3 (Hold) from 2 (Outperform) after the manager’s announcement (on 22 June) of a dilutive one-for-one rights issue. Aside from repaying part of the existing debt, we believe the other uses for the S$337.3m rights issue are highly uncertain and lack sufficient detail. We cannot regard the rights issue or manager’s plans at this stage as compelling.

The rights issue appears excessive, in our opinion, considering that Starhill Global was not even remotely over-geared, at a leverage ratio of 31.1% as at 31 March. Even after the 7.1% asset-value decline (latest valuation as at 15 June 2009) compared with December 2008, the leverage ratio would have increased to 33.4%, hardly overstretched, in our view.

Our earnings (and valuation) scenario assumes that the manager would do nothing with the rights issue except to repay S$236m of debt. We have revised down our distribution-per-unit (DPU) forecasts by 30.6% for FY09, and 47.4% for each of FY10 and FY11, as a result of the rights issue. We have lowered our six-month target price, based on our RNG valuation method, to S$0.47 (ex-rights) from S$0.72 (pre-announcement) previously.

Singapore REITs - More fund raisings to come?

Starhill Global REIT (SGREIT SP; NR) to raise equity. SGREIT announced that it proposes to raise S$337million through 1-for-1 rights issue at S$0.35 per rights unit. The fund raising will be fully underwritten with YTL Corporation committing to up to 75% of the total number of rights unit. Proceeds from the rights issue, according to management, will be used to pare down some of its existing debt, and to capitalise on AEI and acquisition opportunities.

S$5bn capital raised for the sector, how much more do we need? We estimate that S$5bn capital has been raised from the S-REIT sector with S$2.9bn from equity capital market and S$2.1bn from debt capital market (including debt extension) The sector is currently geared at 31% with interest coverage ratio comfortably at above 4.0x on our estimates, with no more debt refinancing for most of the S-REITs over the next 6 months. That said, we are still looking for about S$1bn equity capital to be raised in the space to convert some of the debt to permanent capital.

Opportunistic capital raising to come? Despite the substantial amount of equities being raised YTD, J.P. Morgan S-REITs index has increased by 30% since its March low. Share prices for some of the S-MID cap REITs have more than doubled from the trough, which in our view could help to propel management's decision on potential opportunistic equity capital raisings. In addition, the ever closing gap between the listed and public real estate could provide trust management with more reasons to further strengthen its balance sheet.

Our top picks for large-cap S-REITs remain A-REIT and CMT, which we believe would generate more than 15% in total return at this level. Our picks amongst the SMID-cap S-REITs are FCT and AIT.

Singapore Reit - Yield spreads highlight poor growth prospects

High yield spreads, as a consequence of low risk-free rates and historical DPUs (ie, current distributions are underpinned by rents that have yet to fully revert to market), appear to be encouraging investors to re-visit REITs. We see such spreads as indicative of the lower growth prospects facing asector that will continue to be dogged by negative reversions and asset revaluation deficits, rather than as flashing compelling value.

Net take-up in the CBD was a surprisingly low negative 550,000sf in 1Q09. With the demand outlook weakening, vacancy is likely to rise faster and remain higher for longer than expected, suggesting a drawn-out recovery.

Retail sales in 1Q09 (ex motor vehicles) fell 6.6% y-y, with tourist arrivals down 13.8% in 1Q09. Following a cut in our FY09 GDP forecast to -7.3%, our economics team continues to stress the risk for disappointment from private demand as consumption patterns are impacted by feedback loops from negative wealth effects and a worsening labour market. Operating conditions are likely to remain challenging for Singapore’s retail landlords.

With manufacturing output off 26.1% y-y in 1Q09, double-digit declines in production in most sectors (ex biomedical) suggest industrial landlords will face declining rents and, ultimately, downward pressure on asset prices.

We retain our core rent and yield assumptions, and roll forward asset valuations to FY10F. We continue to see value in the office sector — BUY CCT — though valuations prompt us to cut Mapletree Logistics Trust to REDUCE and Starhill Global REIT and Suntec to NEUTRAL.

REIT - Restarting The CMBS Market

The "catalysts for recovery include the following: a) normalisation in credit markets as systemic risks subside over time, and b) eventual reflation in Asian economies due to fiscal stimuli and growth in domestic consumption." Our anticipated scenario for recovery in the REIT sector has started to unfold.

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.

AREIT announces S$175m devt project for Singtel

AREIT will be undertaking the build-to-suit development of a hi-tech industrial blg for Singtel. The est. invt cost is S$99.6m with a further S$75.8m for the installation of additional equipment. This brings AREIT's devt pipeline to 4 projects amounting to ~S$334m. The blg is expected to have GFA of ~353,723sf upon completion in 1Q10. Singtel will enter into an agreement to lease the devt for an initial tenure of 20 years with annual rental escalation and option to renew for a further 10 years on expiry.

This devt is DPU accretive, with pro-forma DPU accretion of 0.28cts (no comments on the yield; we estimate ~8-8.2%) and 2% net profit contribution, assuming fully debt funded and held for the whole of FY09E. The stability of the long lease, high credit quality of Singtel and absence of leasing risk could justify a tighter yield. It has commented that it may fund the devt by debt and/or equity. AREIT currently has 51% of unutilized bilateral banking credit facilities of S$1,120m and may issue notes from its recently established S$$1bn MTN prog Gearing could potentially rise to around 37.4% (fr 35.5%) assuming full debt funding.

AREITs development activities provides a competitive advantage in delivering DPU growth even in the absence of open market acquisitions. It has historically achieved avg 35% value accretion upon completion (although this is unlikely to be achieved for this transaction), and this may offset book value erosion from potential revaluation deficits. We maintain our Buy with TP of S$1.80. AREIT is currently yielding 9.5% for FY10E.

Frasers Commercial Trust: Results slightly below expectation due to higher interest cost

Operationally weaker yoy. FCOT reported 1Q09 results which were slightly below expectations. Gross revenues and NPI fell by 16-17% yoy to S$24m and S$18.7m respectively on the back of (i) weaker earnings from its Australian properties due to weaker forex and loss of income support from Central Park, (ii) lower draw-down of income support from Keypoint (S$0.9m vs S$2.3m in 1Q08) and (iii) lower contribution from Cosmo Plaza due to the loss of a major tenant.

Further DPU erosion from increasing interest cost. DPU of 0.72 Scts for 1Q09 (-56% yoy, -47% qoq) was largely due to higher than projected interest cost on the extension of its debt facility. Our forward FY09-10 DPU estimates are adjusted downwards to 3.4cts to reflect higher interest cost on its debt.

Writing down a further S$143m off book. FCOT recorded a further devaluation of its portfolio in 1Q09, a reflection of an updated realizable value of its properties in current environment. Management believes that further write-down of its property value is unlikely in the immediate term. NAV is adjusted downwards to S$0.79. As a result, gearing level is hiked up to 58%.

19% of space up for renewal in remaining quarters. A majority of expiring leases are from Keypoint which has an average passing rent of S$4.45 psf pm, we expect continued positive rental reversions given its low base.

Maintain HOLD, TP S$0.18. We believe that improving its balance sheet strength will remain key for a possible re-rating of the stock in the near term. Maintain HOLD, TP S$0.18 based on DCF. FCOT currently offers a prospective FY09-10F yield of 19%.

Suntec Reit - Strains of recession showing.

Suntec REIT reported gross revenue for 1QFY09 of $64.9 million (+16.0% y-o-y), net property income was $49.2 million(+15.4% y-o-y). Distributable income was $46.4 million(+18.2% y-o-y). DPU for the quarter was 2.918 cents (+15.9% y-o-y).Strains of recession showing. Occupancy came off slightly in 1QFY09 with office occupancy of 97.4%(-2.5% y-o-y) and retail occupancy of 98.8(-0.01% y-o-y)%.

Average rent for leases secured in the quarter was also lower at $9.96 vs 4QFY08 average rent of $11.20. Meanwhile, average rent for expiring leases is $6.64 vs 4QFY08 average rent of $5.42. These indicate that while passing rents are playing catch-up to the spot rates, the gap between passing rent and spot rent is also converging much earlier due to falling spot rates. Retail portfolio average rent registered slight increase from $11.02 in 4QFY08 to $11.05 in 1QFY09.

Highlight of the day. Suntec REIT announced refinancing details of its $825 million debt that is maturing this year. $700 million would be refinanced with a 3-year term loan and the other $100 million with a 7-year term loan. All-in interest cost including upfront fees is at a margin of 3.75% on a floating basis. With the refinancing plan in place, the next loan maturity is in 2011 with loan amount of $532.5 million.

The announcement of the refinancing is definitely positive news for Suntec REIT. The ability to secure funding of $825 million at comparatively low interest margin demonstrates the lenders’ confidence in the REIT. Our next concern is the impact of the economy on Suntec REIT. As mentioned earlier, average rents for new leases fell 11% in 1QFY09 from 4QFY08. Approximately 46% of office leases are expiring in 2009 and 2010, which we feel could be subjected to greater rent pressure. We maintain our Hold recommendation with a fair value of $0.69.

Ascendas India Trust - Buy: Attractive Yield, Quality Assets at 43% discount to NAV

Buy — Amidst this current volatility, we see A-iTrust as a defensive play on Indian property. We see its attractive 12-month yield of ~13.2% as a good support and believe its quality leased asset portfolio of 4.8msf trading at ~43% discount to NAV (S$0.89cents) is available at compelling valuations. Reiterate Buy (1M), albeit at lower target of S$0.69 largely adjusting for currency risks.

4Q on track — Revenues grew 13% YoY on higher income from Crest in ITPC (0.7msf), higher rentals on renewals and operations & maintenance income. Net property income, however, grew 8% YoY, offset by increased operating expense. DPU of S$2.05 cents was up a strong 25% YoY. DPU of S$ 4.07cents for 2HFY09 to be paid by 26th May’09 offers a healthy yield of ~8%. We see this as a near-term stock trigger.

Operational metrics strong — 1) 4Q Occupancy is high at 98% with healthy retention rates of 89% on renewals. 2) Large part of 1.5msf is under constr - Chennai Phase III (0.7msf), Bangalore Mall (0.5msf), targeting to complete by 1H/2H 2010. 3) Only ~13% of leases are due for renewal in FY10, reduces risk of vacancies. 4) Increase in Sponsor’s stake to ~25% in Dec’08 (vs. 17% earlier) and cash of ~S$60m (~16% of market cap) is comforting. 5) 1HFY10 DPU due in Nov’09 already hedged at Rs34.63/1SGD though at slightly higher rates (vs. Rs33.7/SGD presently), further adds to yield visibility.

Opportunities and risks — Built-in development pipeline of SEZ (2.7msf) and acq. potential of 536,000sf plus 4.4acres in Chennai Cybervale SEZ are opportunities given low gearing of 9% and will likely boost DPU growth (not in est.). Key risks – marked slowdown in the IT industry resulting in vacancies and rental de-growth and sizeable MTM losses on its currency hedges.

Suntec REIT: Laying refinancing concerns to rest

Successfully refinances $825m loan. Suntec announced it has secured a club loan with 7 banks to refinance the entire $825m maturing this year, underlining the strength of its portfolio and credit standing. The deal comprise of $725m 3-year loan and $100m 7-yr fixed rate loan at a blended all-in interest spread of less than 375bps. With this, the group has no further existing debt due till 2011.

1Q09 results largely in line. Results came in largely in line with expectations as the group renewed 0.3msf of office space and 71000sf of retail space, representing 13% of its portfolio NLA. This was partially offset by lower office occupancy of 97.4%. Office rents achieved average $9.98psf, 11% lower qoq while retail rents remained largely stable. Looking forward, we expect office rents to remain weak owing to slowing demand. The group has a remaining 13% of office and 32% of retail NLA to be renewed in 2009. The office leases are likely to enjoy positive rental reversion, although much smaller than before, as the average level of the expiring contracts are at a low $6.64psf/mth.

Upgrade to Buy. Share price is likely to react positively to the removal of the refinancing overhang. The stock is currently trading at 0.34xP/bk NAV and gearing of 34%. Our 2009/10 DPU projections of 10.7cts and 9.3cts have assumed a 50% drop in peak/trough office rents and a vacancy level of up to 15%. Yield is at an attractive 16.2% and 14%. Upgrade to Buy with TP of $0.82.

Mapletree Logistics Trust: A flat, but better than expected, 1Q09

Fairly flat QoQ. Mapletree Logistics Trust (MLT) posted S$53.3m in 1Q09 revenue, up 24.9% YoY, thanks to acquisitions. Revenue was fairly flat on a sequential basis, up only 1.7% QoQ. NPI margin stood at 86.7% for the quarter, slipping from the 87.6% margin achieved a year ago but slightly better than the 86.1% recorded in 4Q08. Distributable income rose 0.7% QoQ and 36.1% YoY to S$28.6m. MLT will pay out 1.47 S cents/unit, down 22.6% YoY (because of an enlarged units base post last year's rights issue) and up 0.7% QoQ. This translates to an annualized yield of 13.1%. The manager reaffirmed its commitment to pay out 100% of distributable income.

But better than expected. 1Q results outperformed our expectations by 5-8% due to our conservative occupancy assumptions for FY09. Our estimates incorporate a fairly bearish 90% portfolio-wide occupancy assumption over FY09-10. MLT's overall occupancy as at 31st March is 98.5%, versus 99.6% as at 31 December. Some pockets of weakness have emerged: Hong Kong occupancy has fallen from 98.2% as at December to 95.8% at March, while China occupancy has fallen from 99.2% to 91.7%.

Note that the China fall is because of problems with one tenant (contributes less than 1% of total revenue). At the same time, other markets like South Korea, Japan and Malaysia are holding at 100% occupancy. This variety in performance explains the small size of the overall dip, and validates the portfolio's advantages of geographical diversification and balance between multi-tenanted and sale-and-leaseback properties.

Refinancing underway. MLT is geared at about 38.3% debt-to-assets. During the quarter, MLT raised some S$105m in new loans to refinance existing debt. As of 31 March, about S$151m in loans will mature this year, and the manager announced significant progress in arranging refinancing. While a US$20m term loan is still being negotiated, MLT has enough committed lines and cash on hand to refinance all 2009 loans.

Valuation achieved. We believe our investment thesis still stands: occupancy will be the key performance driver in the industrial space; but MLT's diversified and high quality portfolio will allow it to deliver reasonably stable income to unitholders over the next two years. MLT has had a good run, up 15.4% since our re-initiation in February. However, we have not seen enough corresponding positive signals for the industrial market. As our fair value estimate of S$0.45 has been achieved, we are downgrading the stock to a HOLD.

CapitaMall Trust - Buy: Operating Expenses Kept In Check

Annualised DPU largely in line — 1Q09 DPU was 1.97 cents, or 8 cents annualized. CMT will retain S$5.9m (of which $2.6m is from CRCT) of its distributable income in 1Q09. Had it paid 100%, DPU would have been 2.16 cents (annualized DPU: 8.7cents), in line with consensus estimates of 8.9 cents.

Flat revenue, lower operating and financing cost — CMT reported flat revenue qoq for 1QFY09, although its NPI was up 8% as it has been reducing costs aggressively. Operating expenses fell S$6.4m or 13.2% qoq on lower maintenance and marketing expenses. Finance costs also fell 2% as CMT repaid S$150m notes in late Dec 08. Post rights issue, we expect CMT’s finance costs to be significantly lower in the coming three quarters.

Performance of malls — Raffles City registered a 7% qoq decline in revenue, the worst performance amongst the company's mall properties. We think this could be due largely to the weakening office and hotel market. The other malls maintained flat or up 1-2% qoq.

Maintain Buy, reducing TP from S$1.50 to S$1.40 – We cut our DPU estimates by 6-10% due to our lower rental revenue estimates for Raffles City, offset by lower expected operating costs. Our TP falls to $1.40 as a result.

Ascendas REIT - BUY: A Yield of Almost 9%

DPU slightly ahead of consensus — For 4QFY09, A-REIT reported a DPU of 3.23 cents, bring the total DPU for FY09 to 15.18 cents. QoQ, A-REIT grew its rental income by 2% and NPI by 8%. A-REIT wrote down S$115.5m, or 2.5% in asset values, and the average cap rate for its portfolio is approximately 7%.

Portfolio updates — Three properties were completed during the year. Its multi-tenanted portfolio managed an improvement in occupancy in 4QFY09 to 95.6% from 94% a quarter ago. Renewal rental rates continued to grow but at a low rate. However, new demand rental rates for Biz & Science Park and Hi-Tech declined by 12-22% compared to a quarter ago.

Refinancing update – A-REIT will be refinancing its CMBS, due in August 2009, with existing credit facilities. Post refinancing, the average cost of debt would rise from 3.67% to 3.83%, and interest cover would still be a healthy 4.4x. A-REIT has incorporated a S$1bn MTN programme to diversify funding sources and to convert short term borrowings into mid term loans. Its gearing is now 35.5% and 90% of its interest rate exposure has been fixed for 3.4 years.

Maintain BUY, TP at S$2.00 – Operationally, we have raised our NPI to reflect the better than expected performance. However, we have reduced our DPU estimates to reflect the A-REIT change in payment of performance fees in cash rather than in units to minimize gap between EPU and DPU. DPU estimates are lowered by 4-5% and our target price is revised marginally to $2.00 (from $2.01).

K-Reit Asia: Cloudy outlook

K-reits results were in line with expectations, with the effect of positive rental reversions offset by declining occupancy, as weak demand for office space amid rising supply dragged on rental rates and DPU performance. Office concerns have been well documented and share price appears to have largely factored in a deteriorating operating environment. While valuation is inexpensive at implied NPI yield of 6.8% and DPU yield of 12.4%, near term catalyst is lacking. Maintain HOLD with TP of $0.80.

1Q09 results in line. Kreit reported a 29% yoy rise in revenue to $14.8m, lifted by positive rental reversions vs a year ago. NPI and distribution income improved 19% and 38% yoy to $10.8m and $15.7m respectively, as the impact of higher property taxes was offset by reduced interest expense following its rights issue. However, quarterly operating performance was eroded by c9% as higher portfolio rents (+5.9% qoq to $8.06psf vs $7.61 psf in 4Q08) was offset by lower occupation of 95.8%. Both Bugis Junction and Prudential Tower saw take up moderating to 88-92%, and higher costs.

Challenging times. Looking ahead, Kreit's strategy is to retain tenants and manage cost efficiently amid difficult market conditions. While its portfolio seems fairly resilient with a long WALE of 5.5 yrs and 28% of its leases on LT structures, maintaining occupancy would remain challenging with new supply coming in over the next 2-3 years. Our assumptions of a 15% vacancy and 50% peak/trough rental declines till 2010/11 translate to an average DPU decline of 3% pa.

No near term visibility. At the current share price, valuation for Kreit is inexpensive with implied NPI yield of 6.8%. However, give the ongoing sector headwinds, we are hard put to find near-term re-rating catalyst and maintain our Hold call with a TP of 0.80.

Ascott Residence Trust - Results below estimates

Ascott Residence Trust (ART) results were slightly below expectations. Decline in RevPAU is more than expected Uncertainty in major operational markets likely to cap share performance. Maintain HOLD with TP of $0.59.

Results slightly below estimates. Gross revenues and NPI declined by 3.7% to S$42.1m and S$19.9m respectively. This was driven by weaker RevPAU in its major operational markets, which fell by 15% to a portfolio average of S$120. Distributable income was 23% lower at S$10.8m, translating to a DPU of 1.77 Scts for the quarter. On a sequential basis, performance was also slightly weaker, with RevPAU registered a 5% decline.

Balance sheet remains healthy with a gearing ratio of 38% and interest cover of 3.4x. Adjusting DPU estimates. We lowered our forward RevPAU estimates to take into account a larger than expected fall in RevPAU for Singapore and China, resulting in a lower FY09-10F DPU estimate of 7.1 Scts and 6.9 Scts.

Maintain HOLD, TP $0.59 While ART’s valuation of 0.3x P/BV is one of the lowest valued S-reits in the sector, uncertainty from its major regional markets is likely to overhang on share price performance in the near term. Maintain HOLD, TP lowered to S$0.59 based on DCF. ART currently offers a FY09-10F DPU yield of 15%.

Frasers Centrepoint Trust - BUY: Resilient Suburban Malls

Strong 2QFY09 Results — FCT reported DPU of 1.86cents in 2QFY09, 6% higher yoy. Adding back the 5% retained this quarter and 1.67cents in 1Q, 1H09 DPU amounted to 3.63cents, about 49% of our and consensus full year estimates. The AEI on Northpoint should be completed in June-2009 and we expect greater contribution in 2HFY09. We believe full year results could outperform current consensus estimates.

Costs Down, NPI Up — Despite the 2% yoy fall in revenue, largely due to the AEI works at Northpoint, FCT still managed a 2% increase in NPI. This was due to an 11% decline in property expenses, largely attributed to lower maintenance fees and other property expenses e.g. advertising fees. Both Causeway Point (+10%) and Anchorpoint (+32%) recorded improvements in their NPIs and are fully-occupied as at March-2009.

Updates on Northpoint AEI — Some 94% of the enhanced Northpoint is either leased or under advance stage of negotiation, with full works expected to be completed by June-2009. Management expects full operation of the mall to start in July-2009 and should boost portfolio’s NPI by 7%.

Maintain Buy, TP $1.00 — We raise our revenue assumptions and lower property expenses but increase the cost of debt for the $80m of short-term debt from FY10 onwards. Our DPU increases by 11-13% for FY09-11E as a result and we raise our target price to $1.00 (from $0.94). Gearing is at 29.7% and interest cover at 4.55x. All acquisitions are delayed and we view there are no concerns on capital raising. We like FCT’s exposure to the resilient suburban malls sector and maintain our BUY (1L) rating.

CapitaMall Trust - Signs of decline

DPU in line, gross turnover down. 1Q09 results were in line with Street and our expectations. Total distributable income of S$62.6m excludes S$5.9m of revenue which has been retained. 1Q09 DPU of 1.97cts fell 43.4% yoy to form 24% of our forecast for FY09. The yoy decline was due to more units as a result of its rights issue. Gross revenue of S$134.5m was up 11.1% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement initiatives in various malls. Qoq, gross revenue was flat due to a 3.4% qoq decline in gross turnover (all categories affected) as well as a slowdown in reversions.

Reversion rates slowing. While portfolio occupancy had remained stable at 99.5%, reversions showed the first signs of slowing. Based on 125 leases renewed in 1Q09, average rentals grew 1.3% over preceding rates (typically committed three years ago). This represents an annual growth of 0.4%, below the 6-year average annual growth of 3.2%.

Asset enhancement for JEC and Atrium still under review. Plans for the asset enhancement of Jurong Entertainment Centre and Atrium@Orchard are still under review. Subject to market conditions and regulatory approvals, work could start at the end of 2009 for JEC and end of 2010 for Atrium.

No changes to our forecasts; downside risks remain. For the rest of 2009, we expect CMT’s portfolio occupancy to stay rather stable, anchored by its well-located suburban malls. However, with leases accounting for more than 50% of its rental revenue expiring over 2009-10 (21.5% in 2009 and 36.4% in 2010) and possibly worsening unemployment and retail sales, downside risks for rents remain. Maintain Underperform and target price S$0.87, still based on DDM valuation (discount 9.7%).

Ascendas REIT - Ending the year on a good note

FY09 results in line. FY09 distributable income of S$210.9m was up 12.6% yoy. FY09 DPU of 15.18cts was in line with Street and our expectations, forming 97% of our estimate. Full-year revenue of S$396.5m grew strongly by 23% yoy from positive rental reversions in multi-tenanted buildings and stepped increases for single-tenant buildings. Portfolio occupancy as at Mar 09 was 97.8%, down marginally from 98.4% one year ago. However, occupancy of its multi-tenanted buildings improved qoq to 95.3% in Mar 09 from 94% in Dec 08, indicating positive tenant-retention efforts.

Renewal rates still in positive region. AREIT continued to report positive renewal rates (vs. last contracted rates, typically three years ago) for its multi-tenanted properties, with Business and Science Park remaining the strongest at 41.3%. However new take-up vs. the last quarter was mixed: double-digit declines for Business & Science Park, and Hi-Tech sector, but increases for its Light Industrial and Logistics sector. Despite the positive reversions, management stressed that emphasis would be placed on maintaining occupancy, retaining customers and containing operating costs.

Increasingly expensive; downgrade to Neutral from Outperform. We reduce our interest expense assumptions for FY10 from 4.7% to 4.3% as: 1) 90% of its total debt has been hedged, with limited exposure to fluctuating interest rates; and 2) expected all-in cost after Aug 09 refinancing is low at 3.83%. We also reduce our net property income margins from 75% to 73% as we expect development projects completing over the next two years to have lower margins in the first year of operation due to fitting out, and possibly weaker occupancy levels. As a result of our changes, our DPU forecasts for FY10 and FY11 decline by 1-4%.

We also introduce our FY12 DPU forecast of 12.7cts. Our DDM-derived target price (discount 8.7%) decreases correspondingly from S$1.67 to S$1.63. AREIT’s share price has gained 39% since its last low of S$1.06 on 9 Mar 09. Our new target price reflects our view that AREIT will track market performance with 11% upside potential. P/BV at 0.91x looks expensive relative to its industrial peers MLT (0.51x) and CREIT (0.39x). Downgrade to Neutral on valuation grounds.