Singapore REITs. Singapore Industry Focus. A breather from the Fed. DBS Group Research. Equity 7 Oct 2015 STI : 2, delay in rate lift-off

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1 Singapore Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 7 Oct 2015 A breather from the Fed Big cap S-s key beneficiaries iaries from an expected delay in rate lift-off and a more modest hike path in 2016 Retail s to weather uncertainties best as operational headwinds across most subsectors to persist Picks MAGIC, FCT and CRCT Delay in rate lift-off a booster for S-s in the immediate term. The weakness in jobs data from the US prompted DBS economists to revise our forecast for the FED to postpone their rate lift-off to 1Q16 (from Dec 15) and subsequent hikes to be more modest (2 more in 2016 vs 4 previously). 10-year UST and 10-year SG bonds have retreated by 30-40bps from year highs. We believe this to be a positive boost for S-s in the shorter term and big caps like (CMT, CCT, MINT, MCT, K, SUN) should benefit. S-s currently offer an average FY16F yield of 7.0% and with yield spreads of 4.7% at close to its 1 SD range, we see a comfortable buffer for investors to add at current levels. Retail s to perform best in the upcoming 3Q15 results. With a slowing economy, we believe operational headwinds will persist across most subsectors in the upcoming result but we expect the retail s to be the most resilient. FCT and MCT will likely be the top performers amongst peer group given strong foot traffic and sustained tenant sales given their unique mall positioning in their respective locality. We expect most weakness in the hospitality s come 3Q15, despite it being a seasonally strong quarter. We believe that Hospitality s with regional exposure will likely perform better as the outlook for Singapore remains weak. For industrial s, we believe that performance will remain fairly flattish, with market rents expected to further moderate and rental reversionary gap to tighten further as passing rents catch up to market levels. Office s will continue to face increasing headwinds of weak demand in CBD, while occupancy risks might emerge if more firms (especially the telecoms, media sector) look to re-locate to sub-urban locations and business parks to save costs. While we see value in the office s, near term stock performance is likely to be range bound given that rents remain on a downward trend. Prefer s with sustainable growth to withstand medium term uncertainties. Picks MAGIC, FCT and CRCT. Notwithstanding shorter term macro tailwinds, we advocate investors to remain positioned for hikes, focusing on S-s with an ability to grow dividends on a sustainable basis. Stocks we like are MAGIC and FCT. We also believe that CRCT, trading at 7.9% forward yield, is attractive. STI : 2, Analyst Derek Tan derektan@dbs.com Mervin Song mervinsong@dbs.com Rachael TAN rachaeltan@dbs.com STOCKS Source: DBS Bank Mapletree Greater China Commercial Trust : MAGIC is a Singapore real estate investment trust ( ) established with the investment strategy of principally investing, directly or indirectly, in a diversified portfolio of income-producing commercial real estate in the Greater China region. Frasers Centrepoint Trust : Frasers Centrepoint Trust is a retail real estate investment trust with a portfolio of shopping malls located in suburban areas in Singapore. CapitaLand Retail China Trust : CapitaLand Retail China Trust (CRCT) is a real estate investment trust which invests in income-producing retail properties located mainly in China, Hong Kong and Macau. S- yield sector yield spread 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% (%) 0.0% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: DBS Bank Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3-mth 12-mth Yield Yield Spread vs 10-year bond Historical Mean Historical - 1 SD Rating Mapletree Greater , (6.9) 4.4 BUY Frasers Centrepoint , (5.1) 2.6 BUY CapitaLand Retail (16.3) (8.1) BUY ed: TH / sa: YM

2 Peer Comparison FYE Price Rec Target Price Mkt Cap Total Return Yield P/NAV (S$) (S$) S$'m (%) FY15/16F FY16/17F FY17/18F FY15/16F Office / Commercial CCT Dec 1.34 BUY ,939 17% 6.5% 6.9% 7.3% 0.8 FCOT Sep 1.37 BUY ,075 17% 7.1% 7.2% 7.3% 0.8 K Dec 0.97 BUY ,088 23% 7.2% 7.4% 7.5% 0.7 OUECT Dec 0.63 HOLD % 6.6% 7.6% 7.9% 0.7 Suntec Dec 1.55 HOLD ,899 9% 6.2% 6.5% 6.8% 0.7 Retail CRCT Dec 1.37 BUY ,150 32% 7.8% 8.0% 8.2% 0.8 CMT Dec 1.96 BUY ,913 12% 5.8% 6.0% 6.2% 1.1 FCT Sep 1.94 BUY ,774 12% 6.1% 6.2% 6.4% 1.0 SPH Aug 0.95 HOLD ,390 11% 5.8% 5.8% 6.0% 1.0 MCT Mar 1.28 HOLD ,700 19% 6.5% 6.8% 7.0% 1.0 MAGIC Mar 0.93 BUY ,548 29% 7.8% 8.5% 8.5% 0.8 SG Dec 0.76 BUY ,658 17% 6.7% 7.1% 7.4% 0.8 Industrial a-itrust Mar 0.87 HOLD % 6.4% 6.7% 7.6% 1.3 Cache Dec 1.00 BUY % 8.5% 8.7% 8.9% 1.0 C Dec 0.62 HOLD % 8.1% 8.2% 8.3% 0.9 MINT Mar 1.51 HOLD ,673 6% 7.0% 6.9% 7.4% 1.1 MLT Mar 1.01 BUY ,491 18% 7.4% 7.7% 8.0% 1.0 SB Dec 0.82 BUY % 7.7% 7.8% 7.9% 1.0 Hospitality ASCHT Mar 0.66 BUY % 8.6% 8.7% 8.7% 0.9 ART Dec 1.21 BUY ,860 19% 7.3% 7.6% 7.6% 0.9 CD Dec 1.34 BUY ,315 32% 8.3% 8.5% 8.6% 0.8 FEHT Dec 0.66 HOLD ,178 15% 7.2% 7.1% 7.0% 0.7 FHT Sep 0.74 HOLD ,004 20% 8.2% 8.2% 8.3% 0.8 OUEHT Dec 0.81 BUY ,079 29% 8.1% 8.1% 8.3% 0.9 Healthcare & Others P-Life Dec 2.29 BUY ,385 17% 5.7% 5.3% 5.4% 1.3 RHT Mar 0.96 HOLD % 7.6% 8.3% 9.1% 1.0 KDC Dec 1.03 BUY % 6.2% 6.8% 7.2% 1.2 Sector Average 6.8% 7.0% 7.2% Source: Bloomberg Finance L.P., DBS Bank Page 2

3 Key Discussion Point 1: s' Operational Outlook: Headwinds to revenue growth Operational Outlook and Trends No of s CAGR Rental Reversion Sector Covered (FY15-17F) 17F) Trend Office 5 4.1% Retail 4 2.5% Commercial 4 4.9% Industrial 8 2.2% Hospitality 6 0.8% Healthcare 2 1.1% Total 29* 3.2% * DBS covers 29 out of the 36 s/business Trusts listed on the SGX Source: DBS Bank Market Outlook S- DPU Growth by Sectors (FY15-17F) 4.2% 4.0% 2.5% 2.3% 2.1% 1.1% 3.2% Remarks 1. Risks R to top-line growth We are seeing slowing top-line growth outlook for most S-s, translating into a more modest outlook for distributions in the coming years. Based on our forecasts, the S-s are projected to deliver 3.2% growth in DPU over FY15-17F. The growth outlook differs across various real estate sub-sectors, ranging between 0.8% and 4.9%. Office Retail Commercial Industrial Hospitality Healthcare S- Average Earnings Cut by subsectors in 2Q15-2% -1% 0% Office Retail Commercial Industrial Hospitality Healthcare 2. Cautious C guidance for 2H15 2 General management guidance remains cautious and operational outlook for most sectors remains muted with headwinds impairing top-line growth. While the office, retail, commercial, and industrial s are expected to continue recording positive rental reversions in 2H15, we believe that risks are on the downside with rental reversionary gap closing and potentially turning negative in 2016 ( office, industrial sectors). -4% -3% We continue to believe that retail s will remain firmly resilient. Source: Companies, DBS Bank -5% Page 3

4 Operational Outlook and Trends Office Sector Outlook : Negative Office s (all) : Sector thoughts We are still expecting better DPU performance on a q-o-q q q basis for most office s/office-focused focused s. Rental reversions are still expected to be positive; albeit at a lower rate of c5-10% as market rents continue to remain on a downtrend. Occupancy Rates (CCT/K/OUECT/Suntec/FCOT) should remain stable, given the lack of empty space as of 3Q15 but b should be at risk in the medium term when supply completes from end-2016 onwards. Dividend Forecasts YE Reporting Qtr in CY3Q Frequency Paying in CY3Q? FY15/16F DPU (Scts) % achieved YTD DPU trend (q-o-q) q) Company Specific data-points CCT Dec 3QFY15 Quarter Yes % Rental reversions and market rents for its Grade A buildings; acquisition of CapitaGreen (60% stake) Keppel Dec 3QFY15 Quarter Yes % Rental reversion trend for its Grade A office (OFC/MBFC) expected to remain positive, given low expiring rent. DPU to remain flattish as income support for OFC falls off FCOT Sep 4QFY15 Quarter Yes % DPU trend to higher y-o-y on the back of acquisition of 257 Collins Street, positive rents achieved at Alexandra Technopark. Offset by weaker AUD Suntec Dec 3QFY15 Quarter Yes % Completion of AEI at Suntec Retail phase 3 to start contributing to earnings. Office portfolio to remain stable OUE CT Dec 3QFY15 Quarter Yes % DPU to be diluted from recently completed rights issue; pending completion of acquisition of OUBC Source: Managers, DBS Bank Page 4

5 Operational Outlook and Trends Retail Sector Outlook : Stable Retail s (all) : Sector thoughts We believe that retail-focused s will continue reporting firmly resilient earnings and steady DPU growth q-o-q q q and y-o-y. y y. Retail tenant operating environment to remain tough and rental reversions will further moderate. Impact is expected to be on selective malls and we believe that t malls with a (i) larger operational footprint, and (ii) historical track record of high recurring traffic and spend, will do better. Dividend Forecasts YE Reporting Qtr in CY3Q Frequency Paying in CY3Q? FY15/16F DPU (Scts) % achieved YTD DPU trend (q-o-q) q) Company Specific data-points CMT Dec 3QFY15 Quarter Yes % Stable performance expected; mixed performance expected for its portfolio of retail malls FCT Sep 4QFY15 Quarter Yes % Earnings growth driven by expected rental uplifts from Causeway Point and Northpoint SPH Aug 4QFY15 Quarter Yes % Paragon Mall to continue to perform strongly; offsetting the decline expected at Clementi Mall MCT Mar 2QFY16 Quarter Yes % VivoCity to continue to drive portfolio upside with completion of AEI to contribute positively. Downside risk from PSA building, Mapletree Anson given weak operating outlook for office CRCT Dec 3QFY15 Semi-Anl No % Stable performance expected; Wangjing, Grand Canyon and XiZhimen mall continue to drive performance, more than offset the loss of income at Mingzhongleyuan MAGIC Mar 2QFY16 Semi-Anl Yes % Festive Walk expected to remain resilient despite weakness in HK retail market. Contributions from Sandhill Plaza and tailwinds in the strength of the HKD to drive earnings SG Jun 1QFY16 Quarter Yes % Contribution from recently acquired Myers Adelaide to drive earnings. Potential headwinds from currency Source: Managers, DBS Bank Page 5

6 Operational Outlook and Trends Industrial Sector Outlook : Negative/Neutral Industrial s (all) : Sector thoughts We believe that industrial s will continue to report moderating rental growth of 3-5% 3 with selective assets (warehouse/multi-user user factories) potentially seeing negative rental reversions. Ongoing conversions of Single-User to Multi-User factories (A/Cambridge/MLT/Cache) to mean downside to occupancies (loss of efficiency) and lower underlying occupancies. Business Park Segments s to still see highest rental reversions (A/MINT) but likely to have a more modest medium-term outlook. Acquisitions and completions of AEI/Developments for (MLT/A/C/MINT) to underpin earnings stability. Dividend Forecasts YE Reporting Qtr in CY3Q Frequency Paying in CY3Q? FY15/16F DPU (Scts) % achieved YTD DPU trend (q-o-q) q) Company Specific data-points a-itrust Mar 2QFY16 Semi-Anl Yes % Contribution from recently completed acquisitions and development projects A- Mar 2QFY16 Semi-Anl Yes % Portfolio rental reversions est. 5-8%; contribution from acquisitions and in Australia to drive performance Cache Dec 3QFY15 Quarter Yes % Contributions from recently acquired Australian properties and an added boost when the DHL built-to-suit project is completed in 2016 C Dec 3QFY15 Quarter Yes % Portfolio rental reversions of c.5%; contributions from newly acquired properties MINT Mar 2QFY16 Quarter Yes % Positive portfolio rental reversions of 3-5%; completion of various AEI works MLT Mar 2QFY16 Quarter Yes % Portfolio rental reversions of c.5%; contribution from recently completed Australia acquisition SB Dec 3QFY15 Quarter Yes % Contribution from acquisitions; portfolio rental reversions of 3-5% Source: Managers, DBS Bank Page 6

7 Operational Outlook and Trends Hospitality Sector Outlook : Negative/Neutral Hospitality s (all) : Sector thoughts We believe that Hospitality s will continue to see a brief respite in 3Q for SG-focused hotels, given a seasonally strong quarter (F1/conferences). Growth in supply (c.6% per annum) over to remain a key overhang for RevPAR growth. Acquisitions (CD, Frasers HT and OUE HT) to underpin earnings growth. Dividend Forecasts YE Reporting Qtr in CY3Q Frequency Paying in CY3Q? FY15/16F DPU (Scts) % achieved YTD DPU trend (q-o-q) q) Company Specific data-points ASCHT Mar 2QFY16 Semi-Anl Yes % Australian hotels to pull performance upwards; which will offset weakness in SG/China ART Dec 3QFY15 Semi-Anl Yes % Acquisitions to contribute to DPU growth y-o-y and q-o-q; diversified portfolio to mean that performance will be stable CD Dec 3QFY15 Semi-Anl No % 3Q15 is a seasonally stronger quarter for SG hotels; contribution from acquisition of UK hotel FHT Sep 4QFY15 Semi-Anl Yes % Acquisition of Swissotel Wentworth (Sydney) to drive portfolio performance FEHT Dec 3QFY15 Quarter Yes % 3Q15 is a seasonally stronger quarter for SG hotels OUEHT Dec 3QFY15 Quarter Yes % 3Q15 is a seasonally stronger quarter for SG hotels; contribution from acquisition of Crown Plaza Changi Source: Managers, DBS Bank Page 7

8 Operational Outlook and Trends Hospitality Sector Outlook : Negative/Neutral Other s (all) : Sector thoughts Healthcare s (P-Life and RHT) to continue to see upside in DPU, driven by stable earnings structure with annual uplifts. Keppel DC : upside driven by favourable market dynamics, acquisitions. Dividend Forecasts YE Reporting Qtr in CY3Q Frequency Paying in CY3Q? FY15/16F DPU (Scts) % achieved YTD DPU trend (q-o-q) q) Company Specific data-points Keppel DC Dec 3QFY15 Semi-Anl No % Contribution from acquisition in Australia, rental uplift expected to be c.3-5% p.a. p-life Dec 3QFY15 Quarter Yes % Stable performance expected with CPIpegged growth at 1% as SG CPI moderates Religare Health Trust Mar 2QFY16 Semi-Anl No % Uplift driven by Average revenue per bed (ARPOB) for its hospitals of c.5% p.a. Source: Managers, DBS Bank Page 8

9 Key Discussion Point 2: Office s: Attractive Valuations but timing might be early Implied Valuations for Office s (Grade A) Office s Last Price (S$)* Mkt Cap Enterprise Value Book Value Disc Less: Value of Overseas/ Total GFA Implied Value (Grade A) non-grade A (S$) (S$ bn) (S$ bn) (S$ bn) (%) (S$ bn) m sqft S$ psf CCT % (1.0) 3.1 1,541 K % (0.8) 2.6 2,196 OUECT % (0.4) 1.0 2,334 Suntec % (2.2) 2.3 1,975 On an implied basis, most S-s are trading at an implied valuation S$ psf between S$1,541-2,334 which is a discount to current transactions. * Based on price as at 5 th Oct 2015 Source: DBS Bank Recent office transactions in the CBD NLA* Purchase Price Price psf Date Property Location ( k sqft) (S$ m) (S$) Buyer Seller 1Q14 Finexis Building (50%) Robinson Road ,371 NTUC Income Goldman Sachs 1Q14 OUE Bayfront Collyer Quay ,498 OUE Commercial OUE Limited 2Q14 Straits Trading Building Battery Road ,832 Sun Venture The Straits Trading Company Jun-14 Prudential Tower Raffles Place ,316 KOP/KSH/Lian Beng/ Keppel Centurion Global 2Q14 Cecil House Cecil Street ,177 Vibrant Group and DB2 Cheong Sim Lam Capital Aug-14 Equity Plaza Raffles Place ,181 GSH Holdings Keppel Land/Alpha Investment Partners Jul-14 Anson House Tanjong Pagar ,252 SEB CBRE Global Investors Area (ING Real Estate) Sep-14 MBFC Tower 3 (33%) Marina Bay ,790 Keppel Keppel Land Jan-15 AXA Tower Tanjong Pagar ,733 PREH Blackrock Jun-15 One Raffles Place (68% Raffles Place ,382 OUECT OUE beneficial interest) Source: Various news reports, DTZ, CBRE, Colliers, Savills, DBS Bank Page 9

10 Price performance of CCT vs URA Median Rents 2.5 CCT Share price (S$ 12 months 9 months 9 months CBDrents have peaked earlier than expected (2Q15 vs 1H16) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Today CAPITALAND COML.TST. URA office rental index Source: URA, DBS Bank We note that CCT (seen as a proxy for the office market, trades closely to the performance of URA office rental index. The stock has peaked/troughed at 9-12 months before the turn of the office market over the past seven years. Page 10

11 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. 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They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published,the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 Aug 2015 except CapitaLand Commercial Trust, Frasers Commercial Trust, Keppel, Suntec, CapitaLand Retail China Trust, CapitaLand Mall Trust, Frasers Centrepoint Trust, SPH, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, Starhill Global, Ascendas India Trust, Cache Logistics Trust, Cambridge Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, Ascott Residence Trust, CDL Hospitality Trusts, Far East Hospitality Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, Keppel DC 2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Starhill Global, Soilbuild Business Space Reit, Ascott Residence Trust, Far East Hospitality Trust, Frasers Hospitality Trust, Keppel DC as of 31 Aug Page 11

12 3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from Frasers Commercial Trust, OUE Commercial, Soilbuild Business Space Reit, Ascott Residence Trust, Frasers Hospitality Trust and Keppel DC. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 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