Singapore Reits. Singapore Industry Focus. Catching up. DBS Group Research. Equity 20 May 2009 STI : 2,260.36

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1 Singapore Industry Focus DBS Group Research. Equity 20 May 2009 Catching up Results in line with expectations Bulk of 2009 refinancing needs addressed, cashflow is still key Lagged developers in recent performance, room to catch up Preference for suburban retail over office segment Results generally in line. Slower pace of topline growth, +14% yoy and 0.3% qoq, was affected by the weaker hospitality reits performance. NPI improved a better 14% yoy and 4% qoq due to cost containment measures by the Sreits. Distribution income was up a smaller 9% yoy and 0.1% qoq as higher interest cost and more prudent payout policy eroded bottomline growth. Refinancing concerns abating, cashflow preservation still key. With 75% of the Sreit debt due in 2009 already locked in 1Q09, concerns over credit availability is abating. Nevertheless, cashflow preservation is still key given that higher average cost of funding and downward pressure on rents from weaker economic prospects are likely to result in negative DPU growth over the next 2 years. In this regard, Sreits are exploring other avenues of cashflow retention, including lowering dividend payout and dividend reinvestment scheme. STI : 2, Analyst MunYee Lock munyee@dbsvickers.com Derek Tan derektan@dbsvickers.com TOP PICKS Price Mkt Cap Target Price S$ US$m S$ Rating FCT Parkway Life REIT Suntec REIT Starhill Global Be selective. Sreits have lagged developers in the recent price run up and we see room for catching up. In terms of valuation, Sreits are trading on an average 0.5x P/bk NAV and offer average FY09 yield of 10%. We continue to like the Sreits for its attractive valuations, however, in view of the recent run-up we would be more selective at this point. Our top buys remain FCT, Suntec, Parkway Life and Starhill Global. FCT offers dividend yield of %, higher than its comparable peers and its pure suburban retail exposure appears more resilient. Suntec is yielding % over FY Recent debt renewal exercise has removed refinancing needs till We continue to like Parkway Life for its base plus revenue model, low gearing and minimal refinancing risk. We have upgraded Starhill Global to Buy with TP of $0.70. Starhill is yielding c12% FY Newsflow of increased competition from soon-to-open malls have been factored into current share price. The upside risk at this point is the potential of spillover effect of increased pedestrian traffic once these malls open. We have downgraded AiT to Hold purely on valuation grounds after the recent surge in share price. The risk for the Sreit sector at this point remains the possibility of further fund raising if share prices continue to power up. Refer to important disclosures at the end of this report ed: YM / sa: JC

2 Catching up Largely in line. The 1Q09 results reported by Sreits under our coverage were largely in line with expectations. Revenue grew 14% yoy but dipped 0.3% vs 4Q08 as topline growth slowed with moderated rental reversion gap. In general, retail and office reits continued to enjoy positive but moderated growth, which helped offset the decline in revenue from the hospitality reits. NPI improved 14% yoy and a better 4% qoq on cost containment activities by Sreits. At distribution income level, growth was 9% yoy and 0.1% qoq on higher interest expense, lower payout ratio as selected reits such as CDLHT, FCT and CMT held back a small proportion of its earnings for working capital purposes. Comparison of Sreit 1Q09 Performance $m Revenue NPI Dist Inc 1Q09 4Q08 1Q08 Source: Company releases Revaluation deficit impact on book NAVs. Sreits with FY ending Mar 09 or those who have done revaluations as part of their capital management requirements such as Areit, AIT and FCOT, have generally written down their book value by 3-18% (excluding forex translation impact) on higher cap rates as well as adjustment of projected forward rental growth assumptions. Earnings revisions. Post 1Q09 results, Sreits earnings have been left largely intact. CDL HT experienced the largest upward adjustment as better than expected cost management activity led to improved operating margins while ART s numbers were lowered by 9-12% on weaker than expected 1Q09 earnings. FCOT experienced the largest downward adjustment as the group took impairment losses on its Japanese asset and loss of income support from Keypoint while higher than projected interest cost on refinancing led to a 6% cut in FY11 projected earnings. DPU Projections Pre and Post Results Old New % chg Company FY09 FY10 FY09 FY10 AiT /-6 Areit /-3 ART /-12 Cambridge nm CCT /1 CMT /0 CRCT /13 CDLHT /10 FCOT /-19 FCT /0 Kreit /5 MLT /0 Preit /0 Starhill Global /0 Suntec /0 What next for Sreits? Refinancing concerns abating. In addition to the $1.6b of rights issue done by CMT and Areit, about $2.36b of loans was refinanced or had refinancing locked in during 1Q09. The largest came from CCT ($580m) and Suntec ($825m), which were done at between bps above SOR or c 5-5.5% all-in interest cost. On the higher end of the range was AIT with 600bps spread, translating to a 7.046% interest rate, in part due to the offshore nature of the assets. With this, about 75% of the refinancing needs in the Sreit space had been rolled over or repaid. Only about $1.4b of loans left to be refinanced, and come largely from FCOT ($620m), MacarthurCook Industrial ($220m) and Saizen Reit ($290m), all of which are in various stages of negotiations /restructuring with capital providers. While we note that higher funding costs will have some erosion impact on earnings, this should reduce the fear of credit availability in the Sreit sector. Refinancing Transactions in 1Q09 Reit Amount ($m) Interest Cost CCT 580 Blended ave int cost of 4-4.5%, post refi CCT 160 SOR plus 350bps Suntec 825 SOR plus not more than 375bps Cambridge % all in interest cost CDL HT 350 SOR plus 260bps AiT 50 SOR plus 600bps First 70 SOR plus 350bps Source: Company releases Page 2

3 Sreit Debt Maturity Profile as at end Mar 09 Total Assets Total Debt Gearing Gearing Targeted LT Corporate Avg cost Int cover Debt Maturity Profile ($b) Reit ($b) ($b) (%) limit (%) Gearing (%) Rating of debt (%) (x) >2012 Office Frasers Commercial % 60.0% 40.0% BB CapitaCommercial % 60.0% 45.0% Baa K-REIT % 60.0% 45.0% Baa Total Retail/Mixed CapitaMall % 60.0% 45.0% A CapitaRetail China % 35.0% 35.0% nil Frasers Centrepoint % 60.0% 45.0% Baa1/BBB Lippo-Mapletree REIT* % 35.0% 35.0% nil Starhill Global Reit % 60.0% 45.0% Baa Suntec REIT % 60.0% 45.0% Baa Total Industrial A-REIT % 60.0% 45.0% Baa Ascendas India % 35.0% 35.0% nil Cambridge Industrial % 60.0% 45.0% BBB Mapletree Logistics % 60.0% 45.0% Baa Marcarthurcook % 60.0% 45.0% B Industrial REIT* Total Hospitality Ascott Residence % 60.0% 45.0% Baa CDL Hospitality % 60.0% 45.0% BBB Total Healthcare and others First REIT* % 35.0% 35.0% nil Parkway Life % 60.0% 45.0% BBB Saizen REIT* % 60.0% 35.0% Ba Total Total Negative DPU growth over the next 2 years. That Sreits would experience negative DPU growth over the next 2 years is a foregone conclusion, with the sector going through an asset deflation phase as well as weaker economic growth. Sreits are faced with deteriorating rental prospects while higher interest expense would also erode bottomline growth. In this regard, we find Sreits in the office space and those with highest debt maturity in the near term facing the most challenges. But more importantly, despite topline pressure, interest cover should still be sufficient to meet debt covenants going forward and should not trigger a further de-rating of the sector. Interest cover of Sreits Net Interest Cover FY2009 FY2010 FY2011 AIT Areit ART CDL HT Cambridge CCT CRCT CMT FCT FCOT Kreit MLT Parkway Life Starhill Global Suntec Page 3

4 Other avenues of cashflow preservation being explored by Sreits include reducing dividend payout ratio and dividend reinvestment scheme. With the prospect of asset deflation and the consequent impact on gearing, Sreits may still consider fund raising as a means to raise cash to retire debt, particularly when share prices have surged in recent months. We see the greatest risk of this happening in reits with a high proportion of its loans maturing in the coming months/year or those with high payout ratio or those with higher gearing. Valuation and recommendation Reverting to mid-cycle valuations. Share prices of Sreits have lagged those of property developers in recent weeks and are currently trading at attractive FY09 yield of 10% yield and at 0.5x P/Bk NAV. We see room for Sreits to catch from hereon. Share price performance should be supported by the removal of much of the refinancing concerns this year and ratings for Sreits should move towards a more normalized level. Our preference in the Sreit sector would be for those exposed to the more stable suburban retail segment. Our top picks in the sector are FCT, Suntec and Parkway Life Reit. FCT offers exposure to the more stable pure suburban retail segment. Our TP of $0.95 offers potential absolute return of 20%. Suntec Reit is currently trading at FY09-10 yield of 10-11%. Recent renewal of its $825m debt due this year has removed the need for refinancing over the next 2 years. We remain buyers of Parkway life Reit for its resilient topline model and low refinancing risk. We have upgraded Starhill Global Reit to Buy with a TP of $0.70, translating to a FY09-10 yield of c10%. Concerns over increased competition from opening of new malls nearby have been factored in while the upside potential of increased pedestrian footprints generated from these new destinations does not appear to have been factored in into share price. We have downgraded AIT to Hold purely on valuation grounds. Recent sharp share price run up has lowered FY10-11 dividend yield to %, on the lower end of range of its comparable peers. Sreit Comparison Table Share price No of units Mkt cap DPU (cts) DPU Yield (%) Bk NAV P/Bk NAV Target price % upside $ (m) (S$m) FY08 FY09 FY10 FY08 FY09 FY10 $ (x) $ Office Frasers Commercial % 14.5% 14.5% % CapitaCommercial % 11.3% 10.1% % K-REIT % 9.6% 9.5% % Retail/Mixed CapitaMall % 6.3% 6.5% % CapitaRetail China % 7.7% 8.7% % Frasers Centrepoint % 8.2% 8.6% % Starhill Global Reit % 12.2% 11.7% % Suntec REIT % 11.8% 10.3% % Industrial A-REIT % 8.4% 8.5% % Ascendas India % 9.0% 10.4% % Mapletree Logistics % 10.4% 10.4% % Cambridge Ind % 13.8% 13.5% % Hospitality Ascott Residence % 11.2% 10.9% % CDL Hospitality % 8.9% 8.6% % Healthcare Parkway Life % 8.1% 8.2% % Recommendation DPU estimates for Areit and Ascendas India is based on FY09/FY10/FY11 ended Mar Page 4

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