Ascendas REIT

Falling occupancy + positive reversions + completed development projects = flat NPI. Management admits that the outlook for the industrial market remains poor. It expects occupancy of its sale-and-leaseback buildings to hold at 100%, while that of its multi-tenanted buildings to decline. The decline is attributed to the downsizing of existing tenants, rather than complete relocations. AREIT estimates a retention rate of 70% for existing tenants for FY10 (80% in FY09), and assumes that space given up will not be taken by new tenants. This would result in a 5% fall in portfolio occupancy.

Positive reversions. Current average market rents for Business & Science Parks and the Hi-Tech segment have declined 15% (to S$3.50 psf/month) and 10% (to S$2.70 psf/month) from Dec 08, respectively. Despite a narrowing gap between passing rents and market rents, management believes that rentals for both segments could still benefit from positive reversions of 10-15%. Management rationalises that there remain incentives for most tenants to accept moderate increases in rents given a favourable rental gap and costs of relocation.

Development projects. AREIT completed three development projects in FY09: Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent. These would contribute to the current year’s topline. The multi-tenanted building and amenity centre in Changi Business Park, and Expeditors’ build-to-suit project at Airport Logistics Park will be completed in 2009.

Main concern is economic recovery, rather than supply. About 3.5m sq m of industrial space is expected to enter the market over the next three years This represents a 3% increase p.a. based on a stock of 35.3m sq m as at Mar 09. In mitigation, take-up for about half of the Business & Science Park segment has been pre-committed while more than half of the Hi-Tech and Light Industrial supply will be built by industrialists for their own use. Management’s main concern is economic conditions, which determines the demand for industrial space.

Future acquisitions. Although acquisitions are possible with property yields in excess of 8% and borrowing costs of 4%, management is more inclined to be conservative in view of unpredictable access to capital. For the same reason and other operational reasons, it sees the probability of M&As among industrial REITs as limited.

Maintain Neutral and target price of S$1.63. Guidance of flat net property income is more conservative than our own estimates which have assumed moderate growth of 4.7%. However, our assumption for average of debt for FY10 is higher than guidance (4%), at 4.3%. Overall, we believe our assumptions reflect a realistic performance for AREIT this year.

P/BV for AREIT has risen to 1.0x, a premium over the sector average of 0.6x. At this level, we believe AREIT is fully valued. Maintain Neutral and DDM-based target price of S$1.63 (discount 8.7%).

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CapitaLand - Sell: Overvalued

Raising RNAV to S$2.93, target S$2.20 — We raise our RNAV from S$2.74 to S$2.93 to reflect: 1) higher clearing prices for residential prices; we expect the luxury segment to eventually fall by 10% rather than 20% assumed previously; and 2) higher residential prices for its China properties on higher clearing prices for its residential projects. We continue to ascribe a 25% discount in deriving our target as core earnings remain weak.

Launched The Wharf successfully — CapitaLand has launched and sold over 90% of The Wharf Residences at S$1,100-1,400psf. Limited projects for immediate launch — CapitaLand plans to launch Gillman Heights next, likely at the end of the year. There are a limited number of projects that CapitaLand can capitalize on given that it bought most of its landbank towards the later stages of the last cycle.

Stock looks expensive — The stock is trading at a hefty 33% premium to its estimated RNAV and a 09E P/B of 1.3x. On a P/E basis, it is also the most expensive property stock in our coverage, trading at over 50x FY09E and over 30x FY10E earnings. The stock is expensive compared to the market average P/E of 15x and its ROE is also relatively low at 2.4% compared to the market’s 10%.

Cambridge Industrial Trust - Looking to optimise capital structure and portfolio

Cambridge Industrial Trust (CREIT) reported 1Q09 DPU of 1.3Scts (-19% y-y, -6% q-q), which met 27% of our FY09F DPU forecast of 4.9Scts and 29% of consensus FY09F DPU forecast of 4.5Scts. While core operating performance in 1Q09 was largely in line with expectation — gross rental revenue of S$18.4mn (+4% y-y, flat q-q) and NPI of S$16.1mn (+3% y-y, +6% q-q), both meeting 25% of our respective full-year forecasts — the variance from our projection came largely from finance expenses.

1Q09 finance expenses of S$13mn comprise S$4.9mn interest cost on borrowings, which met 23% of our FY09F forecast of S$21.4mn, and S$8.1mn fair value loss on financial derivatives booked during the quarter, which is a non-cash item and was not reflected in our forecast. CREIT’s weighted average all-in interest cost increased from 3.4% at the end of 4Q08 to 5.9% at the end of 1Q09, following the drawdown of the S$390.1mn three-year secured term loan in February. As such, the full impact from a higher cost of debt should be observed in subsequent quarters.
With refinancing concerns now out of the way, management has said that it plans to further improve liquidity and de-leverage its balance sheet to bring its gearing down from 39.9% at the end of 1Q09 to 30% over the medium term. We believe the plan to further de-leverage probably reflects the management’s cautious outlook on the industrial property market. On our numbers, we believe around S$305.1mn could potentially be written off CREIT’s current portfolio value of S$967.7mn over the cycle, which would push its gearing from the current 39.9% to 59% as a result.

Potential ways to further de-leverage include raising fresh equity and asset sales. We understand that notwithstanding the encumbrance of 42 out of the 43 properties in the portfolio, CREIT has an understanding with banks such that asset sales would still be possible. Management believes the current portfolio is not an optimised one and is looking to dispose some properties deemed to be of lesser quality.

Given the priority to conserve capital, we believe CREIT is unlikely to proceed with the Natural Cool Lifestyle Hub (NCLH) acquisition, the purchase option of which expires at the end of June. Besides the motivation to conserve capital, the agreed value of S$55.1mn (S$260psf; initial yield of 6.4% on our estimates) on NCLH also appears hard to justify in the current market. We understand CREIT is not liable for any penalty fee, should it decide not to exercise the purchase option.

We retain our FY09-11F DPU forecasts but roll over our intrinsic NAV estimate to reflect FY10F valuation — gross asset value estimate raised to S$662.6mn (from S$571.1mn), with core net asset value raised to S$0.36/unit (from S$0.25/unit). As highlighted in the previous section, we believe a non-cash revaluation deficit of S$305.1mn could potentially be booked over the cycle and consequently CREIT’s gearing could potentially rise from the current 39.9% to 59%. Our valuation methodology assumes new equity of S$125.1mn to be raised at the current share price to ensure gearing stays within 40% to quantify the fair discount to core NAV that reflects the potential dilution.

As the stock is trading at our core NAV estimate, there is theoretically no dilution to our core NAV estimate if CREIT were to raise new equity at the current share price. As such, we value the stock at our core NAV estimate and raise our price target from S$0.24 to S$0.36 accordingly. Our price target implies a potential total return of 13.9%, including our projected FY10F dividend yield of 13.9%, at the current share price. On a total return basis, the stock has done well YTD, up 43.9% vs the S-REITs universe’s weighted average gain of 39% and the benchmark FSSTI Index’s 32.5% gain over the same period. We maintain our NEUTRAL rating.

Strong recovery in visitor volumes expected with 12m visits for Resorts World at Sentosa (RWS) alone. As the economy recovers from the current downturn, we expect tourist arrivals to rebound by 20% yoy in 2010 after a 12% yoy decline in 2009 (2008: 10m), augmented by the opening of the two integrated resorts (IRs). Genting Singapore alone expects 12m visitors per year comprising 40% locals and 60% tourists. The locals include visitors from the Malaysian cities within a 3-hour driving radius to RWS. Apart from the casinos, both IRs boast a variety of tourist attractions such as the Universal Studios at RWS and the ArtScience Museum at Marina Bay Sands. The increased number of attractions will also enable tour operators to enhance their offerings with longer staying packages to a total population of 2b within a 5-hour flight radius.

Occupancy could return to above-80% levels from 2010 onwards. There is a huge supply of around 11,807 new hotel rooms in 2009 through 2012 adding to the existing stock of 31,364 rooms. This implies a 4-year CAGR of 9% in the Available Room Nights. However, our analysis suggests that occupancy rates could still return to above-80% levels, factoring in a mere 3% 4-year CAGR in tourist arrivals from 2008 to 2012 (vs the historical 10-year CAGR of 5%) at an average length of stay (ALOS) of 3.7 days. Our forecast of a 20% rebound in visitor arrivals in 2010 is expected to result in above-80% occupancy levels from 2010.

RevPAR expected to stand pat. Notwithstanding the recovery in occupancy levels back to above 80%, we expect RevPAR to remain largely unchanged as a result of the offsetting effects of lower room rates. Zeroing in on 2010, we expect promotional discounts at the IR hotels and knock-on effects on other hotels to keep room rates at 2009 levels of S$140-145. In the longer term, we expect room rates to stabilise below the historical three-year average of S$170 as we expect IR operators to offer more appealing rates in order to attract gaming revenue, and for the effects to trickle down to other hotels as well.

Well positioned to receive increased visitor arrivals. A recent newspaper report noted that Novotel Clarke Quay, owned by CDREIT, has already filled 80% of its rooms for the 2009 Formula One event at lower rates. Novotel Clarke Quay is the only hotel bucking the trend even though it is not a trackside hotel, according to the report, as other hotels are seeing lacklustre response even with early-bird offers. We expect to see a similar situation with the opening of the IRs in 2009 and 2010. We believe the knock-on effects from the opening of the casinos will be great, and CDREIT is well positioned to benefit from this as all of its properties in Singapore are strategically located either in or near the Central Business District (close proximity to Marina Bay Sands) and Orchard Road.

We remain positive on CDREIT for its fixed rent component and its potential to reap benefits from the opening of the IRs. Our target price of S$1.24 is based on a two-stage dividend discount model (required rate of return: 7.7%; terminal growth: 2.5%).

Allgreen Properties - Sell: Valuations No Longer Compelling

Downgrade to Sell — Allgreen has risen 150% YTD and has outperformed the STI by a hefty 85%, making it the best performing developer in our coverage. The stock is now back to June 08 levels. In addition, the discount has narrowed significantly to 25-30% currently (from a peak of 75-80%) vs. its historical average discount of 40%. We think upside from here is likely to be limited and hence we downgrade Allgreen from Buy to Sell.

Increasing RNAV to S$1.43, target S$1.07 — We raise our RNAV from S$1.27 to S$1.43 on higher clearing prices for Allgreen’s residential projects. We have raised selling prices by 10-15% depending on the timing of launches. Allgreen should be able to ride the positive sentiment given it has several launch-ready projects waiting to enter the market.

Ready-for-launch sites available — Allgreen has just soft-launched One Devonshire at S$1700-1850psf. We understand that at least 10 units have been booked during the first days of the preview. There are a total of 156 units. We understand that interest for the project is strong. Aside from One Devonshire, we expect Allgreen to launch its RV Residences (220 units) at River Valley and Suites at Orchard (118 units) at Handy Rd. We expect selling prices of $1,200 to $1,400psf.

Mapletree Logistics Trust - External demand exposure to impact rents/occupancy

Our Singapore economics team sees weakness in external demand as the major threat to the economy. This, combined with a contraction of manufacturing output by 26.1% y-y in 1Q09, does not augur well for industrial demand, either for flatted factories or warehouses. According to the Ministry of Trade and Industry, Singapore lost 19,900 jobs in the manufacturing sector in 1Q09, with 1,700 transport and storage jobs lost in the same period. While recent data from the URA suggest that industrial supply is slipping, we expect vacancy in both the flatted factory and warehouse segments to broach 10% by yearend, impacting rents and asset value expectations. Indeed, in Mapletree’s recent 1Q09 results announcement, it was evident, in our view, that the REIT had opted to trade rent for tenure. While occupancy in the portfolio at end-1Q09 was 98.5% (down from 99.6% at end-FY08), renewals of expiring leases saw “flat” average reversion rates, a precursor to potential negative reversions. Approximately 166,700sm is subject to renewal in 2Q09-4Q09F, equivalent to 8% of the portfolio.

Since 2005, Mapletree Logistics Trust’s DPU yield has averaged 7.22%, equating to a 433bps spread over the average 10-year government bond of 2.89%. Currently, MLT’s FY10F yield is 8.6%, versus the current 10-year government bond of 2.60%. The historically low yield spread between MLT’s DPU yield and prevailing risk-free rate reflects, in our view, the market’s growth expectations for the REIT over the period driven by rental reversions and acquisitions — we note that during 2005-08, MLT saw average annual compound growth in its DPU of 19.2%. While we see MLT’s growth prospects as markedly different from those experienced in 2004-09 (we forecast its DPU will fall 30.6% over FY08-11F), there is inevitably a temptation to extrapolate past trends. Adopting the historical yield spread (433bps) and the current risk-free rate of 2.6% implies a yield of 6.93% (versus MLT’s current yield of 8.6%), equating to a unit price of S$0.74/unit. We believe our asset-based approach to valuing MLT incorporates the cashflow risks of both negative reversions and higher vacancy risk, and believe such “spread analysis” is both overly simple and simplistic.

We have revisited our earnings numbers and marginally raise our DPU forecasts for FY09-11F on the back of income expectations from recently completed/acquired properties. In addition to the marginally higher earnings, we have rolled forward our intrinsic net asset valuation to FY10F and determine an NAV of S$0.43/unit (previously S$0.37/unit). Valuations prompt us to cut our rating on MLT to REDUCE from Neutral.

Ascendas REIT - Demand concerns remain

Manufacturing output contracted 26.1% y-y in 1Q09, with double-digit declines in industrial production in most sectors (ex biomedical), suggesting that industrial landlords will be faced with declining rents, and, ultimately, downward pressure on asset prices. Net demand in the industrial factory space contracted 315,382sf in 1Q09, down from net take-up of 1.5msf in 4Q09. According to the Ministry of Trade and Industry, Singapore lost 19,900 jobs in the manufacturing sector in 1Q09. While recent data from the URA suggest that industrial factory supply is being marginally delayed, future supply is nevertheless high with 18.2-20.2mn sf expected to be completed in 2009 and 11.3- 16.8mn sf to be competed in 2010. This is compared to the ten-year average supply of 6.5mn sf and 15-year average of 9.1mn sf, with the vacancy on our numbers likely to broach 10%, adversely affecting rental expectations. We retain our view that industrial rents are likely to fall 31.7%, to about S$1.33/psf per month.

Since 2004, Ascendas REIT’s DPU yield has been an average of 6.3%, equating to a 345bp spread over the average ten-year government bond of 2.88%. Currently, AREIT’s FY10F yield is 8.2%, vs the current ten-year government bond of 2.6%, delivering a spread of 720bp vs the historical average of 345bp. The historical low yield spread between AREIT's DPU yield and the prevailing risk-free rate, in our view, reflects the market’s growth expectations of the REIT over the period driven by rental reversions and acquisitions. We note that during 2005-08, AREIT saw average annual compound growth in its DPU of 13.9%. While we believe AREIT’s growth prospects are different than those it experienced during 2005-09 (we forecast DPU to fall 21.1% over FY08-FY11, in part due to the rights issue), there is inevitably a temptation to extrapolate past trends. If one adopts the historical yield spread of (345bp) to the current risk-free rate of 2.6%, this would imply a yield of 6.057% (vs its current FY10F yield of 8.2%), equating to what we would describe as an inflated unit price of S$2.10/unit given the market outlook. We believe our asset-based approach to valuing AREIT incorporates the cashflow risks of both negative reversions and higher vacancy risk, and believe such “spread analysis” is overly simplistic.

We have revisited our earning numbers and have marginally raised our DPU forecasts for FY09-FY11 on the back of income expectations from recently completed development properties. In addition to the marginally higher earnings, we have rolled forward our intrinsic net asset valuation to FY11F and determine an NAV of S$1.24/unit. (Previously March year-end FY10, value of S$1.17/unit). We maintain our REDUCE call.

We believe the key risks remain the performance of the Singapore manufacturing and logistics sector, which would affect our forecasts for occupancy, rents and capitalisation rates, following the recent equity-raising. We expect AREIT to be adversely affected by the deteriorating economy, although we believe investors seeking liquidity in the REIT sector could offer unit price support.

Starhill Global REIT - Fairly valued

In past notes we have flagged that while Starhill Global REIT’s 1Q09 results were broadly in line with our expectations, the weakening economic environment is likely to bring lower retail and office rents in 2H09F, and heightened occupancy risk, as new supply comes on stream. According to Jones Lang LaSalle, some 2.5mn sf of new retail supply is due for completion in 2009F and 2.3mn sf in 2010F.

The distribution of new supply is relatively evenly spread over the next two years, with 33.4% scheduled to be completed in the prime shopping districts, 33.8% in secondary shopping districts, and 32.9% in suburban locations. Approximately 1.4mn sf of new and refurbished malls will be opened in Orchard in 2H09F, including ION Orchard (663,000 sf), 313 Somerset (294,000sf), Orchard Central (250,000sf) and Meritus Mandarin (215,000sf), directly competing with Starhill’s prime Orchard Rd properties Wisma Atria and Ngee Ann City.

Amid rapid deterioration in the economy, we have seen a faster contraction in occupancy and greater decline in office rents than previously anticipated. According to JLL, office demand in the CBD contracted by 558,418sf, resulting in CBD vacancy rising to 6.9% in the CBD Core. In the past six quarters, net demand in the Singapore CBD has contracted by 813,008 sf, with Orchard Rd rents falling 21.6% q-q in 1Q09 and now 35.0% down from the peak, impacting reversions in the REITs office towers in Ngee Ann City. While the supply/demand outlook has deteriorated, we have maintained our office rent assumptions — rents falling by 57.0% from peak to trough — as incremental increases in vacancy are likely to have less impact on overall rents, with an improvement in the quality of stock underpinning a marginal rise in rents late in the cycle, notwithstanding higher vacancy, which is likely to be concentrated in poorer quality buildings. That said, we caution that the recovery is likely to be slower than in past cyclical corrections. Expectations of a lower growth profile in rents, in part, are reflected in our expectations for capitalisation rates to move out by 50bps over the cycle.

We have revisited our valuation for Starhill Global REIT, rolling forward our intrinsic NAV to FY10F, from FY09. Our adjustments to earnings forecasts reflect expectations of marginally weaker office occupancy following weaker-than-expected 1Q09 demand estimates. We peg our new price target to our FY10F intrinsic value of S$0.74/unit (previously: FY09, S$0.70/unit), with the rise in NAV underpinned by a lower dilutive impact of a possible capital raising on our expectations of possible revaluation deficits. We assume circa S$115mn of new capital is raised at the current share price of S$0.73/share; previously we assumed capital was raised at S$0.47/unit, the unit price at the time. While we see inherent value in the Orchard Rd assets, valuations prompt us to cut our rating to NEUTRAL, from Buy.

CapitaMall Trust - Demand weak with supply looming

The slowdown in Singapore’s GDP outlook and a fall in domestic consumption at a time of rising new retail supply present a challenging operating environment for domestic retail landlords. The reality is that the circumstances on the ground continue to deteriorate with Nomura’s economics team in the past quarter having cut its 2009F GDP growth expectation further to –7.6% from –6.3%. In this context, we think the retail sector is not immune to the broader economic slowdown. We retain our headline forecast for rents to weaken 17% over the cycle (CBRE indicating that 1Q09 rents had fallen 3.3% q-q) as competition among landlords for existing tenants intensifies, given the volume of new supply — some 2.5mn sf is due for completion in 2009F and 2.3mn sf in 2010F. The distribution of new supply is spread even for the next two years, in our view, with 33.4% scheduled to be completed in the prime shopping districts, 33.8% to be completed in secondary shopping districts and 32.9% to be completed in suburban locations, leaving CapitaMall’s city and suburban retail malls exposed to increased competition. Landlord net income also is likely to be trimmed once the overall retail expenditure falls, negating the fillip from leases structured with a turnover component.

Our Singapore economics team believes that while external demand perhaps is the greatest threat to the Singapore economy, private demand could disappoint and be weaker than expected, owing to feedback loops from negative wealth effects and a worsening labour market.

Since 2004, CapitaMall Trust REIT’s DPU yield has been an average 5.77%, equating to a 289bp spread over the average ten-year government bond of 2.88%. Currently, CapitaMall Trust’s FY10F yield is 6.0%, vs the current ten-year government bond of 2.60%, delivering a spread over the risk-free rate of 355bp. The historical low yield spread between CapitaMall Trust’s DPU yield and the prevailing risk-free rate in our view reflects the market’s growth expectations of the REIT over the period driven by rental reversions, asset enhancements (specifically in relation to decanting of space) and new acquisitions. We note that during 2004-09, CapitaMall Trust saw average annual compound growth in its DPU of 11.8%. We see that CapitaMall’s growth prospects are markedly different than those it experienced during 2004-09 — we forecast DPU to fall 30.6% over FY08F-FY11F. That said, there is inevitably a temptation to extrapolate past trends. If one adopts the historical yield spread (289bp) to the current risk-free rate (2.6%), which would imply a yield of 5.49% (vs its FY10 yield of 6.0%), equating to a unit price of S$1.53/unit. We believe our asset-based approach to valuing CapitaMall Trust incorporates the cashflow risks of both negative retail and office rental reversions, and higher cashflow risk given the shift to a more discretionary retail tenancy mix and higher vacancy risk, and believe such a “spread analysis” is overly simplistic.

We have revisited our valuation by rolling forward our intrinsic NAV to FY10F from FY09. We have subsequently pegged our new price target to our FY10F intrinsic value of S$1.19/unit (previously FY09 S$1.14/unit) and reaffirm our REDUCE call on CapitaMall Trust.

Hongkong Land - Cancellation of Tower Four Purchase at One Central

An Icelandic insurer, Sjóvá-Almennar tryggingar hf, cancelled the purchase of Tower Four (68 units) of One Central in Macau effective Monday, according to Shun Tak, Hongkong Land’s JV partner for the project. The majority of the 30% deposit will be confiscated while Tower Four will be re-launched at a later stage according to Shun Tak.

We estimate that the cancellation, net of confiscated deposits, might reduce Hongkong Land’s FY09F earnings by 2% while the NAV impact is negligible (<1%).

Background of Tower Four purchase: The Icelandic insurer purchased Tower Four (68 units) of One Central Residences backin October 2006 for HK$782mn, or an average ASP of HK$4,400psf (vs current market price of around HK$4,600psf), for which it had paid a 30% deposit with the remaining 70% to be settled upon handover of units.

Hongkong Land has a 49% stake in the One Central project in Macau, consisting of 796 residential units and 98 serviced apartments, which are expected to be completed in 4Q09F and 2010F, respectively. Prior to the cancellation by the insurer, over 97% of the One Central residential units had been pre-sold.

Our US$2.77 price target is based on a 29% discount to Hongkong Land’s end-FY10F NAV of US$3.90, representing a mid-cycle valuation. We see upside risks should Central rents turn out to be more resilient than expected. Under a scenario where Central Grade-A office rent bottoms at HK$70psf instead of our assumed HK$51psf, we would estimate 25% potential upside to our end-FY10F NAV of US$3.90 to US$4.90, which implies a valuation of US$3.50 based on mid-cycle discount of 29%.

Starhill Global REIT - Embarking On Campaign For Regional Expansion

Surprised by sudden rights issue. Starhill Global REIT (SGREIT) has announced a fully underwritten renounceable 1-for-1 rights issue at S$0.35 per rights unit to raise S$337.3m. The rights units are priced at a 45.3% discount to the last closing price of S$0.64. Rights units are entitled to distribution accruing starting 1 Jul 09. The joint lead managers and underwriters of the rights issue are DBS, Merrill Lynch and Credit Suisse. YTL Corporation has undertaken to subunderwrite up to 75% of the total rights issue. An EGM will be held on 13 Jul 09 to seek approval from unitholders for a whitewash resolution to waive their rights to receive a mandatory offer from YTL.

Embarking on campaign for regional expansion. SGREIT intends to pursue acquisitions, embark on asset enhancement initiatives and pare down its debts. It is scouting for opportunities to invest in distressed assets in Singapore, Malaysia, China, Japan and Australia, particularly from distressed sellers having difficulties in refinancing debt. In Malaysia, SGREIT could potentially acquire retail assets from Starhill REIT which is listed on Bursa Malaysia. The company targets an asset size of S$3b within two years.

SGREIT plans to invest S$100m for an asset enhancement initiative at Wisma Atria (plans not finalised yet), which will add 40,000sf of retail space fronting Orchard Road. Reducing debt will also help it attain a lower cost of borrowing when refinancing S$617m of debt facilities due next year.

Cut target price. We have cut our 2010 DPU forecast by 40.7% to 3.5 cents due to dilution from the rights issue and trimmed our assumptions for office rentals at Ngee Ann City and Wisma Atria. We cut our target price by 25.2% to S$0.80 based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.0%).

CityDev - weaker hotel margins and deferrals of prime projects

1Q09 net profit of S$83.1 mn (-50% YoY, -17% QoQ) was CIT’s lowest since 2Q06. It came in at 14-18% of our and consensus’ FY09E, due mainly to lower profit margins, higher taxes and loss of S$7.2 mn mainly from share of loss of 52.5%-City e-Solutions’ education services (MindChamps, which was sold by March 2009).

Net gearing remains healthy at 0.47x. Management is encouraged by pent-up demand at the low to mid-end residential segment, as it sold 330 units at The Arte, Livia and Botannia YTD, but may defer pre-sale at prime Quayside Isle @Sentosa to completion in 2011.

FY09-11E earnings have been cut 11-23% on lower hotel earnings and slower takeup at ongoing prime projects. End-2009-RNAV was raised to S$5.53 (from S$5.18) on currency adjustments, and The Arte achieving higher-than-expected pricing and sales. With reduced risk aversion, we peg our target price to 1x RNAV (from 0.8x).

Its stock price has run ahead of the still-weak fundamantals as it almost doubled since bottom in March, implying return-to-peak residential prices and M&C doubling in value, which we believe is unlikely.

Suntec Reit - No refinancing concern till FY11F

Suntec REIT’s (SUN) 1Q09 DPU of 2.9Scts (+15% y-y, +2% q-q) met 30% of our previous FY09F forecast of 9.9Scts and 31% of the previous consensus forecast for FY09F of 9.5Scts. Core operating performance in 1Q09 was ahead of our expectation — gross rental revenue of S$64.9mn (+16% y-y, +2% q-q) and NPI of S$49.2mn (+15% y-y, +3% q-q) met 28% of our respective full-year forecasts. Net financing expenses in 1Q09 were also lower than our expectation. Interest on borrowings of S$10.7mn met just 17% of our full-year projection of S$64.4mn. The average financing cost of SUN at end-1Q09 was 3.0%, compared with 3.3% at end-FY08 and our previous full-year estimate of 3.4%.

While committed occupancy declining sequentially for office and retail properties in 1Q09, we believe management’s ability to contain office vacancy at just 2.6% and retail vacancy at 1.2% is commendable in the current context. We think this is especially so for office properties, where the relatively low vacancy was achieved as some 55% of office leases, excluding One Raffles Quay (ORQ), originally due for renewal this year were negotiated in 1Q09. While our assumption of 8% vacancy through FY09F appears conservative, with the bulk of the office leases expiring this year rolled over, we retain our assumption pending further guidance from SUN’s 2Q09 results update.

Together with the 1Q09 results announcement, SUN announced that it has secured from seven banks S$725mn three-year fixed rate and S$100mn seven-year floating rate term loan facilities, with a blended all-in interest margin of less than 375bps to refinance all S$825mn worth of debt maturing this year. The term loan facilities are secured against Suntec City Mall and parts of Suntec City Office. While the cost appears to be above our expectation, this announcement has removed a major stock overhang, on our reading.

Based on the current average financing cost of 3.0% and assuming a base rate of 1%, the implied financing cost of SUN immediately post-refinancing would be circa 3.8%, versus our projection of 3.6%. Following the full drawdown of the S$825mn new term loan facilities by the end of this year, SUN will not have any more debt due for refinancing until February 2011, when S$32.5mn of MTN loan matures.

We roll over our intrinsic NAV estimate to reflect FY10F valuation and raise our gross asset value estimate from S$3.35bn to S$3.7bn (+10.4%), as well as our core net asset value estimate from S$0.85/unit to S$1.02/unit (+20%). On our numbers, a noncash revaluation deficit of S$1.71bn (our gross asset estimate of S$3.7bn versus the latest portfolio valuation of S$5.4bn) could potentially be booked over the cycle and, consequently, SUN’s gearing could rise from the current 36.9% to 52%. Our valuation methodology assumes new equity of S$447.9mn to be raised at the current share price to ensure gearing stays within 40% in order to quantify the fair discount to core NAV that reflects the potential dilution. Accordingly, we raise our price target from S$0.82 to S$1.00 (+22%). Our price target implies a potential total return of 9.2%, including our projected FY10F dividend yield of 8.2%, at the current share price.

On a total return basis, the stock has performed well YTD, up 51.3% versus the S-REITs universe’s weighted average gain of 39% and the benchmark FSSTI index’s gain of 32.5% in the same period. Accordingly, we downgrade our rating to NEUTRAL on valuation grounds.

K-REIT Asia

K-REIT reported 1Q09 DPU of 2.4Scts (-48% y-y, -11% q-q), which met 24% of our previous FY09F forecast of 9.9Scts and 27% of consensus’ previous FY09F forecast of 8.9Scts. Core operating performance in 1Q09 was broadly within expectations — gross rental revenue of S$14.8mn (+28% y-y, +3% q-q) and NPI of S$10.8mn (+18%, -8% q-q) met 25% and 24% of our respective full-year forecasts, while finance expenses of S$6.1 (-19% y-y, -1% q-q) met 26% of our full-year forecast.

However, we are concerned with the rise in portfolio vacancy: committed occupancy in all properties, with the exception of One Raffles Quay (ORQ; remained 100% let as of end-1Q09), declined during the quarter and the overall portfolio committed occupancy stood at 95.8% at the end of 1Q09, compared to 99.0% a quarter before. The biggest rise in vacancy came from Bugis Junction Tower (BJT), which saw committed occupancy slide from 100% at the end of 4Q08 to 91.5% at the end of the last quarter. The rise in vacancy was likely the result of a branch of Prudential Life Assurance, a major tenant that used to occupy some 20,000 sq ft in BJT, moving to a new transitional office building along Scotts Road.

To put things in perspective, the 320bp rise in portfolio vacancy was against a backdrop where 39% of the leases due for renewal this year were negotiated in 1Q09, suggesting relatively weak tenant retention. To be fair, we believe management probably traded occupancy for rents, considering the average portfolio gross rent registered a 5.9% sequential increase in 1Q09 to S$8.06psfpm. On our estimates, implied average rents at Prudential Tower (PT), Keppel Towers-GE Tower (KTGET) and BJT registered 1.3- 18.1% sequential increases in 1Q09. The passing rent at ORQ also appears to have increased, judging for the 12.9% sequential increase in dividend income from ORQ in 1Q09.

We cut our gross asset value estimate from S$1.41bn to S$1.4bn (-0.7%) and core net asset value from S$1.31/unit to S$1.26/unit (-3.8%) chiefly to reflect our revised office rental forecast and K-REIT’s updated lease expiry profile as well as FY10F valuation. On our numbers, a non-cash revaluation deficit of S$701.4mn (our gross asset value estimate of S$1.4bn vs the latest portfolio valuation of S$2.1bn) could potentially be booked over the cycle and consequently, K-REIT’s gearing could rise from the current 28.7% to 41%. Our valuation methodology assumes new equity of S$16.9mn to be raised at the current share price to ensure gearing stays within 40% to quantify the fair discount to core NAV that reflects the potential dilution. Accordingly, we lower our price target from S$1.29 to S$1.23 (-4.7%). Our price target implies a potential total return of 31.9%, including our projected FY10 dividend yield of 8.9%, at the current share price.

CapitaCommercial Trust - Pricing in the rights issue

1-for-1 rights issue announced to raise S$828.3 million. CCT announced that it will issue 1.4 billion new shares through a 1-for-1 rights issue, priced at S$0.59/rights unit to raise S$828.3 million. The rights issue is fully underwritten, and CapitaLand will take up their pro-rata share of 31.4%. The proceeds from the rights issue will be primarily used to reduce the borrowings. In addition to the rights issue announcement, the trust has revalued its investment property down by 10.1% to S$6billion. Assuming debt is reduced by S$760million, gearing will be 30.7% post rights issue and devaluation.
Adjusting our estimates for rights, Dec-09 price target of S$0.85. We have revised down our DPU estimates for FY09/FY10 by 41%/38% to account for the rights issue, and book value has been reduced by about 40% to S$1.52/unit for 2009. Based on a discount rate of 8.0% (8.6% previously), our new Dec-09 DDM-based price target is S$0.85/unit (S$0.81/unit previously).

Short-term risk biased on the upside, but operating fundamentals remain challenging. The announcement of the fully underwritten rightsissue would, in our view, remove the EFR overhang on CCT, and we dosee some short-term upside risk to the share price. That said, we believe that operating fundamentals are still challenging in the medium term and that the current share price largely reflects the income stream from the underlying portfolio based on post rights NPV. We therefore retain our Neutral rating on CCT.

Key risks to our rating and price target on the upside include 1) market's increasing risk appetite for relatively higher beta stocks; 2) a quicker-than-expected bottoming out and recovery of the rental market. Key downside risks include a worse than expected rental reversion.

Frasers Commercial Trust - Impending equity/asset injection

Prior to the impending refinancing of its S$550mn in debt due in July 2009, Frasers Commercial Trust (FCOT) opted to revalue its portfolio booking a net revaluation deficit of S$143.6mn. With the revaluation deficit (FCOT’s revised book value is now at S$0.79/unit), gearing rose to 0.58x at end-1Q09. On our numbers, gearing is likely to increase further given the likelihood of further asset revaluation deficits as market asset values fall. According to JLL, since the market peak, capital values have fallen 27.6%, although further downside risks remain, given the slide in rents. Recent transaction and valuation evidence in Singapore suggests that office values are down by around 35% since the peak. In May 2009, Anson House was reportedly sold for S$85mn (equivalent to S$1,100/psf) down from S$129.5mn (S$1,701/psf) achieved in 4Q07, a fall of 34.4%. Similarly, Parakou Building was recently sold for a reported S$81.4mn (equivalent to S$1,280/psf) down from the S$128mn achieved in 2Q07, equating to a fall of 36.4%. While FCOT has booked revaluation deficits on its Singapore properties, ie, its Keypoint office building at S$294mn (equivalent to S$941/psf) versus its acquisition price of S$370mn in 4Q07 (S$1,186/psf), a fall of 20.5%, the write-downs to date may still not be enough. On our numbers, we expect FCOT to book a further revaluation deficit of S$247mn, pushing gearing to 0.73x. While technically not in breach of the Monetary Authority of Singapore’s (MAS) guidelines (as the rise in gearing is driven by the deterioration of the asset base rather than an increase in gross borrowings), refinancing of its current debt, in our view, will be dependent on addressing gearing concerns.

While FCOT is looking to divest assets — notably Cosmos Plaza and its interest in AWPF — at best, we estimate FCOT will raise S$85mn, from this disposal, which would only modestly bring gearing down to 0.56x (vs 0.62x projected for end FY09). We believe the REIT will need to do more; consequently, we believe a rights issue or asset injection from the parent is likely.

On our numbers, FCOT will need to raise S$440mn to address the dual issue of declining asset valuations and rising gearing. As an alternative to a straight capital raising it is possible that parent Fraser and Neave (F&N) could inject assets from its own portfolio, potentially the original seed assets it intended for its own sponsored REIT. The subject assets that F&N originally intended to inject into a standalone REIT were Alexandra Point, Alexandra Technopark and Valley Point (office and retail), with an estimated value of around S$600mn. Assuming two of the three assets are injected at a value of around S$440mn, FCOT REIT’s gearing could potentially fall from 0.62x to 0.40x. The offset to this would be a dilutive equity issuance. On our numbers, this would be dilutive by about S$0.19/unit (assuming stock was issued at a modest discount to the current share price), with FCOT markedly increasing its stake in the REIT from a current 22%. It seems plausible that a combined asset injection and rights issue will be proposed, checking the parent’s stake (Fraser & Neave) to below 50%. While technically the scenario would trigger a general offer (GO), we believe FNN would seek a GO waiver prior to the execution of the transaction.

We have revisited our earnings numbers and have marginally cut our DPU forecasts for FY09-FY11 by 2-5% to reflect expectations of higher vacancy in the group’s Singapore portfolio given the greater-than-expected contraction in net demand in 1Q09. Not withstanding the changes to our occupancy assumptions, we have rolled forward our intrinsic NAV to FY10 with our new value S$0.48/unit (vs S$0.47/unit), with the lift driven by higher translated values from the REIT’s Australian and Japanese assets, in spite of more conservative cap rate assumptions for the group’s Australian assets.

While our core NAV is not adjusted significantly, our valuation methodology incorporates the potential for dilutive capital raising to check gearing at 0.40x. On our numbers, as discussed above, we see FCOT having to make a further asset writedown of S$247mn as discussed earlier, which could drive gearing to 0.73x, higher than the MAS’ limit of 0.60x. Note: a REIT is not considered to be in breach of the 60% gearing limit if it is attributable to depreciation in the value of the REIT’s assets. We assume that FCOT will need to raise additional equity of around S$440mn to keep gearing below 0.40x. We now assume that this equity will be raised at S$0.22/unit, a modest discount to the current unit price (vs S$0.17/unit previously, which was the unit price at the time) so the theoretical capital raising would have a lower dilutive impact than we had previously adjusted for, ie, S$0.19/unit (vs S$0.23/unit previously) resulting in our price target being raised to S$0.29/unit (from S$0.24). We have highlighted in previous notes that FCOT faces a number of issues, with the deteriorating office market compounded by translation losses and higher funding costs. While FY09F looks challenging, expectations of a resolution of refinancing issues (in part supported by parent Fraser & Neave as discussed above) should provide a much needed catalyst for re-rating of the stock and we retain our BUY rating.

CCT - Raising new equity to address FY10F debt maturities

On 22 May, CapitaCommercial Trust (CCT) announced a 1-for-1 rights issue to raise S$828.3mn in gross proceeds, pricing 1.4bn rights units at S$0.59 a piece. Excluding 3% issue expenses, the net proceeds of around S$803.5mn will be used to reduce S$885mn worth of borrowings maturing next year. In our 15 April update (Lower property taxes, interest rates, mitigate sharper office rental fall), we had highlighted that CCT may need to raise additional equity of around S$867.1mn to ensure that its gearing remains below 0.4x, based on our projected asset values. As such, the move was not entirely surprising, although the discount at which the rights units were priced was steeper than our expectation (we note that CCT’s share price shot up 28% between April 30 and the day before the rights issue was announced on 22 May [compared to a 17% gain in the FSSTI index over the same period], suggesting that the discount originally intended may not be as steep as it subsequently turned out to be).

Assuming that the S$370mn convertible bonds are put back to CCT in FY11F, CCT has S$1.012bn worth of borrowings due for refinancing in FY11F. CCT has demonstrated the ability to execute the refinancing of S$736mn worth of borrowings due this year, despite challenging credit market conditions, and with the financial flexibility of around S$3.05bn worth of unencumbered assets [at end-May valuation, includes One George Street (OGS), which will be unencumbered once part of the new equity raised is used to pay down the S$650mn two-year secured term loan due next year, but excludes the Raffles City asset, in which CCT owns 60%], we believe CCT will be able to address FY11F debt maturities as well.

CCT reported 1Q09 DPU of 3.2Scts (+25% y-y ; +20% q-q), which met 30% of our previous FY09F DPU forecast of 11Scts and 29% of consensus FY09F DPU forecast of 11.1Scts. Its core operating performance was slightly ahead of our expectation – gross rental revenue of S$97.5mn (+37% y-y; flat q-q) and NPI of S$69.9mn (+41% yy; +6% q-q) met 26% of our respective full-year forecasts – but the variance from our projection largely came from net finance expenses.

1Q09 net finance expenses of S$18.9mn comprise S$21.2mn of interest on borrowings, which met 21% of our full-year forecast, amortisation of transaction cost of S$2.9mn, which met 28% of our full-year forecast, and a S$5.1mn gain in remeasurement of financial derivatives, which is not reflected in our forecast.

Despite a challenging operating environment in 1Q09, CCT managed to roll over with positive reversion around 38% of leases due for renewal this year at Six Battery Road (6BR), around 52% of leases due for renewal this year at Raffles City Tower (RCT) and even 10% of the leases due for renewal next year as well as in FY11F at Capital Tower (CT). The fact that portfolio vacancy was maintained at a low of 3.3% at the end of 1Q09 (2.3% by end-April) despite CCT’s proactive lease management was also commendable, in our view.
We have rolled over our intrinsic NAV estimate to reflect FY10F valuation — gross asset value estimate raised to S$4.73bn (from S$4.36bn previously). To arrive at our price target, we had previously adjusted our core NAV estimate to reflect potential dilution from any equity-raising to pre-empt a non-cash revaluation deficit of S$1.3bn (our gross asset value estimate of S$4.73bn vs. the latest portfolio valuation of S$6.03bn) to potentially be booked over the cycle.

Now that the equity-raising has materialised and the gross proceeds of S$828.3mn to be raised is close to our initial estimate of S$867.1mn, we believe the potential overhang is now removed. As such, we raise our price target to S$1.07 (+12.6%) from S$0.95 (FY09F core NAV estimate, adjusted for rights – in our 22 May update [Preempting revaluation deficit], we stated that “Adjusting for the rights, our core intrinsic NAV estimate is diluted from S$1.33/unit previously to S$0.95/unit (-28.6%), which is lower than the S$1.16/unit estimate (our price target) that we had supposed to reflect potential dilution from equity-raising…. On the math, this would imply an adjusted price target of S$0.95…”). Our price target implies a potential total return of 24.1%, including our projected FY10F DPU yield of 6.5%, at the current share price.

Starhill Global REIT briefing

1) Rationale for Rights issue

a) Repayment of borrowings
The bulk of SGREIT's borrowings (~S$617m) is due for refinancing in FY10. SGREIT will prepay some of these borrowings with proceeds from the Rights issue in order to strengthen its balance sheet and put itself in a better position to renegotiate for better refinancing terms when the other borrowings are due in FY10. There will be no prepayment penalty for the borrowings.

b) Asset enhancement initiatives
Part of the proceeds may be utilized for asset enhancement initiatives at Wisma Atria. The plot ratio of Wisma has not yet been fully utilized. Management is planning to increase the GFA by 40,000 sq ft which will cost approximately S$100m.

c) Acquisition
SGREIT sees acquisition opportunities in mature markets such as Singapore, Australia and Japan that could arise as credit market remains tight.

2) Property Valuation

- The decline in property valuation was largely due to its office assets. This situation was similar to CapitaCommercial Trust, where independent valuers have assumed higher cap rate (15 bp increase for SGREIT's Singapore office assets) and steeper decline in office rents in the valuations.
- Valuations of retail properties remain largely unchanged.

3) Credit market condition remains challenging

Local lenders have been filling the lending void that has been left behind by foreign banks that have either pulled out or scaled back their operations in Singapore. Demand for real estate loan may be too much for the local lenders to absorb and thus leading to the tight credit market condition. The CMBS market remains shut.

Frasers Centrepoint Trust: Is the pipeline ready for resuscitation? Not just yet.

FCT up sharply YTD. Frasers Centrepoint Trust (FCT) is up 51% YTD and is now trading at 0.74x book. A buy rationale at this price level implies, in our view, expectations of growth either through 1) the re-rating of existing assets, which we don't see much economic evidence for, or 2) through value-accretive acquisitions.

Opportunity in pipeline. FCT is comfortably geared at 29.7%. It also does not have to look far for potential deals: recall that FCT has a pipeline of four retail malls from sponsor Fraser & Neave [FNN, NOT RATED] under a right of first refusal (ROFR). We believe the ROFR, which expires in 2011, has been a key investment driver for FCT. FCT's acquisition plan is currently suspended due to difficult market conditions. At the 2Q briefing, the manager commented on the divide between the physical market and S-REIT valuations. FCT's price has increased 30% since then, and it is now trading at a yield of 7.5%.

NP2 most compelling. Among the ROFR assets, we find Northpoint 2 most compelling because of the small deal size and its synergy with an existing asset - Northpoint. The asset is close to 100% leased. A put and call option agreement with a price range of S$139.5m-S$170.5m is in place. The agreement expires in December 2009. If 100% debt funded, buying NP2 would increase FCT's gearing to about 42-45%.

But stumbling blocks, still. Note this pricing range is roughly equivalent to a 12% discount to 8% premium on Northpoint's Sept 2008 valuation. This is not a very attractive deal, in today's context. We think the market may be more receptive to a "cheaper" deal; a desire FNN may have no interest in accommodating. The deal structure itself also promises to be complex - if the buy is not 100% debt-funded, FNN may need to do its part as a 51% stakeholder. This holds even if FCT goes for potentially lower priced third-party assets. A potential solution is a cash-and-shares deal on a pipeline asset, sidestepping the need for a large EFR. But financing acquisitions may not be a top priority for FNN, especially when sibling Frasers Commercial Trust [FCOT, NR] presents a more pressing case for sponsor support. As such, we believe a buy call is yet to be justified on FCT. Our fair value estimate rises to S$0.75 (previously: S$0.62) as we relax our discount rate to reflect a lower cost of equity. Maintain HOLD on valuation grounds.

Wing Tai - Large write-downs highly unlikely

Cautiously Optimistic on Singapore Property space. While management is more positive now on the sustainability of the current physical market resurgence, they are still maintaining a cautious stance. The instability of global financial markets and the unraveling of potential deferred payment scheme defaults are seen as the key risk factors. For now, the company intends to hold off on land bank acquisition and ride on the improvement in transaction volumes to clear some inventory at reasonable profit levels. Over the longer term, management believes that factors such as the opening of the Integrated Resorts and the return of expatriates on the back of a recovering global economy will induce foreign buying in the Singapore Property market, which should in turn improve long term fundamentals of the sector.

Seeking comfort from profile of buyers. Wing Tai has sold 45 out of total of 79 units launched at the Belle Vue Residences out of which 30 units were sold at S$1,600-1,900 psf in the last 3-4 weeks.The buyers are mostly (80%) Singaporeans that have the purchasing power and the ability to take delivery. A large portion of them are private residential upgraders that are capitalizing on prices that are about 30% off peak levels. The company is further encouraged by the fact that there are no bulk buyers or buying under shell companies for their projects this time round. Management also noted that property owners who cashed out from earlier enbloc deals are returning to the market for investment properties.

Large write-downs highly unlikely. Management doesn't see write-downs for land banks as an issue in the current environment. On its office properties, however, there is less clarity than in the residential segment, and there could be some downside on the back of falling rentals and capital values. The passing rentals are above S$10 psf pm at the Winsland House and the new renewals have been done at the S$8-9 psf pm. The occupancies are around 90-95%. Adjustments are not expected to be substantial, since the previous revaluation was done in a relatively conservative manner.

Retail business sees slight pick up from late May. The retail business started slowing from February, after the Chinese New Year period. It has since picked up from late May. However, on an overall basis, it is still down about 10%.

Keen on China. On venturing overseas, the company has suspended its residential project in Chengdu since the Sichuan earthquake due to negative sentiments surrounding tall buildings. The development would have been one of the tallest buildings in the CBD. Having said that, it is watching for China projects very closely, and hopes to secure projects with mid-to-high end market positioning soon.

Slightly more cautious in Malaysia. Wing Tai has deferred construction on Menara DNP in Malaysia. The reason for holding back on the luxury project is that demand is not expected to be strong in the near term. Due to the oversupply in the KLCC area, the company is focusing its attention on its developments in the embassy belt ? Verticas Residensi, and the Jalan U-Thant Site.

City Development - results below forecast- hotels a drag

1Q09 PATMI of S$83m (-5% YoY, -17% QoQ) came in below forecast on weak hotel earnings and slowing devt profit booking. PBT on hotel ops and property devt fell 60% and 56% YoY to S$21m and S$69m respectively, while rental properties performed better on positive rental reversions (PBT +47% YoY) although occupancy rates have fallen from 94% to 91%. Projects such as City Square, Botannia , Solitaire and One Shenton con tributed.

Management comments that for the 439 units completed in 1Q09, almost all buyers have paid up including those on DPS. Mgmt is fast-tracking the launch of the mass-mid range sites where demand remains firm and plans to launch the former Hong Leong Condo by 4Q09, while the launch of Quayside could be deferred until TOP (by 2011). For the South Beach project (which targeted completion has also been deferred to 2016), the JV partners are in the final stage of negotiations with the consortium banks on re-financing of the land. Mgmt expects construction cost to decline further and are refining development plans for the site.

We have revised down our FY09-11E earnings by ~9% to reflect weaker earnings contribution from M&C, and forecast a 20% decline in FY09 PATMI to S$450m. FY09E earnings should be underpinned by progressive profit recognition from projects approaching TOP (Botannia , Tribeca, Oceanfront). We estimate around 161 units sold in 1Q09 vs just 8 units in 4Q08. Take- up has hit 74% and 55% for The Arte & Livia while profit recognition has yet to commence. RevPAR for Apr continues to be weak (-23% YoY) and there could be downside risk to hotel earnings. Stock is currently trading at a 5% disc to RNAV of S$8.45.

Starhill Global REIT - 1-for-1 rights issue at S$0.35 per rights unit

Starhill Global REIT has announced a fully underwritten renounceable 1-for-1 rights issue at S$0.35 per rights unit to raise S$337.3m. The rights units are priced at a 45.3% discount to last closing price of S$0.64. The company intends to pare down existing debts, pursue acquisitions and embark on asset enhancement initiatives. Rights units are entitled to distribution accruing starting 1 Jul 09.

The joint lead managers and underwriters of the rights issue are DBS, Merrill Lynch and Credit Suisse. YTL Corporation has undertaken to sub-underwrite up to 75% of the total rights issue. EGM will be held on 13 Jul 09 to seek approval from unitholders for whitewash resolution to waive the rights to receive mandatory offer from YTL.

Starhill Global valued its portfolio of investment properties at S$1,954.6m as at 15 Jun 09, a decline of 7.1% from valuation conducted on 31 Dec 08. The company's gearing has therefore increase from 31.1% to 33.4%. The 1-for-1 rights issue will reduce gearing to 20.7%.

Stamford Land - Almost All About Currencies; Counting On Reversal

Stamford Land has, like sister-company Singapore Shipping, cut its final dividend to 1 cent from 1.5 cents, and skipped the special, which was 1 cent a year ago, for a total 75% reduction (half for Sing Ship to 1 cent, excluding the 12-cent special the year before). Stamford Land posted a $6.67 mln loss in Q4 bringing the total profit for the fiscal year to $4.08 mln, vs $42.94 mln the year before.

Stamford Land’s property development business suffered like everyone else anywhere in the world during the March quarter (Stamford Land’s Q4). Sale & marketing expenses relating to Stamford Residences & Reynell Terrace in Sydney (122 apartments, 2 penthouses, 5 terraces and retail space) amounted to $2.9 mln in the fiscal year, for instance. (Stamford Land recognizes development profit only on completion; the latest fiscal year saw the completion of Stamford Residences in Auckland.)

The hotel business however did not fare too badly, with revenue effectively up, if we take into account the 20% drop on currency translation.

The weakness of the A$ and NZ$ clearly contributed, with forex losses totaling $6 mln in the latest fiscal year, and which played havoc with Other Reserves, which went from positive $46.2 mln as at Mar ’08 to minus $32.72 mln at end Dec ’08 (during which A$ fell to a low of 0.91 against S$ from Oct ’07 high of $1.35), and minus $16.55 mln at end Mar ’09 (A$ recovered to $1.07; but NZ$ hit a low of 76 cents against S$ vs $1.21 high in July ’07). This in turn helps explain the drop in NAV per share to 41 cents at end Mar’09 from 51 cents a year ago.

The swing to $4.43 mln deferred tax charge for the latest year, from $14.82 mln deferred tax credit is also a major feature of Stamford Land’s results. Note that the $42.9 mln profit for ye Mar ’08 was largely due to the deferred tax benefit. The company assures of strong profits for fiscal years ending Mar 2011 and 2012, when rental income from the office development (Dynons Plaza) kicks in, and when Stamford Residences & Reynell Terraces is due for completion (80% sold as at end Mar ‘09), respectively. (Stamford Land recognizes development profit only on completion; the lastest fiscal year saw the completion of Stamford Residences in Auckland.) We are inclined to upgrade the stock from HOLD.

Note the significant recovery of the A$ in recent months, thanks to the strong recovery of commodity prices (up 14% in May making them the best performing asset class). With interest rates reduced significantly in the past year (to 3%, lowest in 49 years), economic recovery accompanied by rising property demand should not be too far behind. This should in turn help reverse much that went “wrong” in the last fiscal year.

CapitaLand - Asset allocation into China to increase to 40-45%

At the recent launch of the Raffles City brand in Ningbo (formerly known as Capital Plaza), CapitaLand’s management announced its intention to increase the Group’s asset allocation into China to between 40-45% over the next few years, up from 26% in FY08. The Group remains on the lookout for distressed assets in China.

To support funding needs for new and existing projects in China, CapitaLand also signed cooperation agreements with Bank of China and Industrial and Commercial Bank of China to obtain a credit limit allocation of up to RMB25b (S$5b) to fund CapitaLand’s various business operations across China. We view this as positive accreditation of CapitaLand’s presence in the Chinese market.

CapitaLand’s launches in Foshan and Chengdu this year have been well-received, with small ASP increments with subsequent launches. CapitaLand is looking at replenishing its landbank in Shanghai and Beijing. According to the Straits Times, CEO Liew Mun Leong believes that Tianjin and Changsha also present a lot of opportunities.

CapitaLand had increased its stake in Gillman Heights from 50% to 60% in mid-May, and could possibly launch the new project for sale by 2H09. With construction costs easing, we estimate the breakeven price to be around $753 psf, with an ASP of about $900 psf. CapitaLand may also re-launch Latitude at Jalan Mutiara at an ASP of about $1600 psf.

We view the move to increase its asset allocation into China positively, as CapitaLand already has a 15-year track record in the ever-growing Chinese market. Even sentiments in the Singapore residential property market have improved, suggesting the possibility of more sales in 2H09 and 2010. We reiterate our BUY recommendation, with a target price of $4.24, pegged to a 10% premium to our RNAV of $3.85.

ParkwayLife REIT – Setting the stage for growth

PREIT has appointed Mr. Tan Seak Sze as the new Vice President of Investment with effect from 15 June. Mr Tan Tee Meng, who previously held dual roles as VP of Asset Management and Investment, had been re-designated to VP of Asset Management. We read this as PREIT being ready to take a more active stance on acquisitions and asset enhancements initiatives (AEI).

The management stated its intention to reduce tenant concentration risk from PHL from the current 80% to about 40-50% in the long term and is open to investing in more nursing homes, medical units or funds in Japan, Australia, Singapore and Malaysia, possibly adopting the similar inflation-linked leasing structures. AEIs are also advancing, with indicative yield of more than 10%.

Fitch ratings downgraded PREIT’s long-term issuer default rating and $500m MTN program to ‘BBB’ to ‘BBB+’ on weak credit profile of sponsor, Parkway Holdings (PHL), despite PREIT’s good interest coverage, low debt cost and refinancing risk, and stable rental mechanism. PHL owns Parkway Hospital Singapore Pte Ltd, the operator of PREIT’s hospitals in Singapore. However, we believe the negative has been priced in.

The credit-rating downgrade centres on whether PHSPL is able to service rental payments to PREIT, should credit quality of PHL deteriorate. We believe that such concerns are overplayed as the master lease agreement confers PREIT the right as a creditor to claim the rental guaranteed for the remaining lease period in the event PHL goes into financial distress.

Our target price has been raised to $1.17 as we roll forward our DDM valuation to FY10F. The stock price has increased 24% over the last three months since our initiation despite the premium over S-REITs but has lagged the FSTREI by 14%. Entry of new shareholders from Europe, US and Asia observed by the management during this period affirms our belief in the long term growth potential of PREIT. Reiterate Buy.

Ascendas Real Estate Investment Trust - Steady as She Goes

Initiating coverage of Ascendas REIT with an EW rating and S$1.70 price target: A-REIT is our new sector top pick, with 11% upside. We like A-REIT for its high dividend yield of 8.5% for F2010e and 8.7% for F2011e, supported by long-term leases, a diversified tenant base, and its ability to generate inorganic growth via development of built-to-suit properties. A-REIT is now our sector top pick, given its high dividend yield compared with other large cap peers, limited risk of further capital raising, and recent underperformance (since STI low in March 09) that we believe to be unjustified. At current levels, A-REIT is trading at a 12m forward yield premium of 2.6% and 2.8% to CCT and CMT – high compared with the historical yield premium of 1.7% and 1.0%, respectively.

Long-term leases provide stability: A-REIT’s portfolio of sale and lease-back (SLB) properties, which are typically occupied by single tenants, contributes ~50% to net portfolio income, we estimate. These leases typically run for 5-15 years with annual step-up clauses and provide A-REIT with income stability.

Development capability supports dividends: Since its IPO in 2002, A-REIT has completed or is currently in the process of completing a total of 11 properties worth ~S$650mn. Built-to-suit properties have higher yields than acquired properties and long-term tenants that give stability to the portfolio. A-REIT has executed its previous built-to-suit properties well, we believe, and should continue to attract tenants seeking built-to-suit properties.

Risks to our call – Positive: Vacancy levels rise more slowly than expected; A-REIT announces new development projects. Negative: Faster-than-expected rise in vacancies and fall in rentals; loss of a large tenant in one of A-REIT’s single-tenanted buildings.

CapitaLand Ltd: Leveraging on China's growth story

Secured RMB25b credit lines from Chinese banks. Earlier this week, CapitaLand (CapLand) announced that it had secured RMB25b (S$5b) of credit lines from two Chinese banks - Bank of China and Industrial and Commercial Bank of China. New credit lines will give CapLand direct access to a significant amount of RMB funding which will help to support CapLand's growing operations in China. As at end 1Q09, assets in China accounted for 28.2% of CapLand's total assets (ex-cash) and with the funding support, CapLand is well-positioned to achieve its targeted 40%-45% of total assets from China. Recent improvement in the China property market could also be sustainable, as backed by China's improving economy, urbanization trend and supportive government policies and CapLand should benefit with its significant exposure in China.

Acquisitions needed for re-rating. While the securing of new credit lines is positive for CapLand's China operations, we believe that CapLand's strong balance sheet and strength in capital management have already been reflected in its share price which is currently trading at a premium to its peers. With credit market thawing, there is now less incentive to hoard cash, which generates low returns to shareholders. We are now looking beyond the strength of CapLand's balance sheet and focusing our attention on the value that CapLand can generate through the deployment of its funds. At current price level, we believe that accretive acquisitions will be the key for re-rating of CapLand's shares.

Maintain HOLD. We have raised our RNAV estimate of CapLand from S$2.95 to S$3.34, on the back of improved valuations of its listed investments and lower discount rate that is in line with the higher risk appetite for equities. While recent buying sentiment in the Singapore property market has improved, we think that it is still early for us to raise our selling price assumptions for CapLand's landbank, which has a significant exposure to the high-end segment, as the bulk of the sales had come from the mass market segment and had also been largely driven by aggressive price cutting by developers. Nevertheless, we are now removing our RNAV discount on CapLand (previously 30% discount), on the back of better outlook for its China operations. As such, our fair value of CapLand has now been raised from S$2.43 to S$3.34. We maintain our HOLD rating on CapLand and will turn buyers of CapLand at price level of S$3.00 to S$3.10.

SC Global Developments - 1Q FY2009 results - fair value raised from S$0.67 to S$1.13

1Q FY2009 results. SC Global reported 1Q FY2009 revenue of S$33.0m (+32% yoy) and net profit of S$10.5m (-45% yoy). Revenue was higher due to the consildation of revenue from AVJennings Ltd, which became its Australian subsidiary in December 2008. Net profit was lower because of higer administrative and operating expenses from AVJennings Ltd.

Earnings estimates for FY2009F to FY2011F. SC Global is expected to remain profitable because it has achieved large sales of its residential projects in 2006 and 2007, and revenue will be recognized as construction progresses. Net profit is expected to increase from S$40.7m in FY2009F to S$203.8m in FY2010F based on the percentage of completion of its projects. After that, net profit is likely to fall to S$128.5m in FY2011F as most of its projects have already been completed in FY2010F.

Outlook for FY2009F. SC Global highlights that it is encouraged by the increase in private home sales in Singapore and Australia. It is currently in the planning and design stage for its projects at Ardmore Park and Sentosa Cove. Furthermore, it expects to remain profitable as it recognises revenue from projects that have been sold.

Maintain HOLD recommendation, fair value raised from S$0.67 to S$1.13. We are maintaining our hold recommendation as SC Global has not launched properties for sale recently. Moreover, the luxury property market in Singapore has not registered sales above S$2,500 per square foot for the past three months. However, due to the improvement in buying sentiment for the property market, we are raising the fair value from S$0.67 to S$1.13. This is based on 50 percent discount to the RNAV of S$2.26.

CapitaMall Trust - The Behemoth In Retail

Retail sales have rebounded. 1Q09 performance was disappointing as consumers shied away from shopping malls during the Chinese New Year season. However, shopper traffic and retail sales bottomed out in Feb 09 and picked up in Apr-May 09. Negative growth for retail sales has narrowed. Basic and necessity goods have fared much better than luxury items.

Quality malls attract long-term tenants. Occupancy reached 99.5% in 1Q09, which is impressive as there is little impact from the recession. CMT benefitted from a flight to quality to well-located malls. Core tenants, eg BHG, Cold Storage and NTUC Fairprice, are players with long-term plans for the Singapore market. Renewal and new leases for 169,233sf of space signed in 1Q09 boasted rental rates that were 1.3% higher than preceding rates.

Occupancy remains in the high-90%. We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic was heavy. There were no visible vacant shops at the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09. We are impressed by CMT's efforts in organising promotional, cultural and educational activities to attract shoppers.

We raise our 2010 and 2011 DPU forecasts by 6.1% and 13.0% to 8.7 and 7.8 cents respectively after factoring in contributions from Jurong Entertainment Complex, which will be completed in 2H11. We also expect occupancy to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with a target price of S$1.70, based on a dividend discount model (required rate of return: 7.2%, growth: 3.0%).

However, there is another report saying... In the midst of tapering islandwide retail occupancy, we visited three of CMT's competitor malls and conclude that CMT's portfolio should be resilient despite the competition. We are now more positive that rental levels at its suburban malls can be supported. We change our rent assumptions for most of CMT's malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%, and have adjusted for the number of REIT units post-rights. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12-25%. Our new DDM-derived target price is S$1.26, up from S$0.87. Compared with its peers, CMT is expensive at 0.86x P/BV and 6% yields vs. the sector average of 10.2%. Maintain Underperform.

Plife rating lowered

Fitch has lowered its rating for Plife’s “Long Term Issuer’s Default” and its $500 mln multi-currency “Medium Term Note Program”, by one notch to BBB from BBB+ , despite the latter’s healthy financials: gearing of 23% at end Mar ’09 vs MAS’ 60% guideline.

The downgrade is likely because of Plife’s sponsor Parkway Holdings’ massive hospital / medical centre project in Novena. Note the tender was secured in mid February ’08, at land cost of $1.246 bln, and development costs estimated at $300-500 mln.

(Note also the persistent concern over Plife’s “single customer exposure”, given its heavy dependence on lease income from the 3 Singapore hospitals, which are managed by Parkway Holdings: Mount Elizabeth , Gleneagles , and EastShore . Parkway Holdings owns 35.6% of PLife.)

Note that Parkway Holdings had on 31/3/08 announced a 7-for-15 rights issue at $2.18 to raise $760 mln to part finance the Novena acquisition. (30% of the 779,000 sf gross floor area is intended for medical suites, 36% for in-patient beds, 20% for diagnostic services , and the balance for retail & ancillary services.)

However, Parkway’s gearing remains high: at end Mar ’09, borrowings totaled $1,220.63 mln against shareholders funds of $1,370.68 mln. Cash amounted to $553.64 mln.

Any knee-jerk reaction, to say below 90 cents, would be an opportunity to buy more PLife units. BBB is still investment grade, albeit borderline case. At 95¢, annualised yield based on Q1 ‘09 payout is 8%.

Yanlord Land - May contract sales - Rmb1.4bn

FY09 earnings largely locked in. Yanlord achieved Rmb1.4bn contract sales in May based on our latest conversation with management. This brings the company's YTD contract sales to Rmb5.3bn, surpassing its 2008 full-year sales of Rmb4.8bn. We note that sales for markets other than Shanghai have picked up in May, which contributed to 48% of the total monthly sales. Together with Rmb1.1.bn sales carried over from last year, we estimate that more than 80% of the group's FY09E earnings have been locked in.

Inventory has been largely cleared. With contract sales running at an extremely high rate for the last two months (Rmb1.9bn for April and Rmb1.4bn for May), Yanlord has cleared a substantial amount of its inventory carried over from 2008, with little inventory left in Yanlord Riverside City in Shanghai (the completed portion) and Nanjing Bamboo Garden.

Development margin likely to peak this year. We estimate that Yanlord’s development margin (post LAT) will be at a high of 42% in 2009, thanks to Yanlord Riverside City project in Shanghai. With only 90,000sqm of GFA left for sale in this project, we expect development margin (post LAT) to start to decline in 2010 (39% on our estimates), with a larger scale drop likely in 2011 (31% on our estimates).

Eye on Tianjing launch in July. Yanlord has postponed the launch of Tianjing Yanlord Riverside Plaza slightly from June to July. As no more major launches are expected this month, we are looking out for a quieter June, unless management decided to push out more units from Yanlord Riverside City in Shanghai for pre-sale. Yanlord Yangtze Riverside City in Nanjing is likely to be launched on schedule in August this year.

Wing Tai - Earnings dragged down by non-cash impairment charges

Wing Tai (WT) announced a 3Q09 net profit of $21.4m – a 23%-decline yoy, 2% improvement qoq. The results are below our expectations, with YTD net income of $78.9m forming 56% of our full-year estimate.Its 3rd quarter revenue fell by 10% yoy to $89.6m, but remained relatively flat sequentially. Revenue was mainly recognized from sold units at Helios Residences and The Riverine by the Park.

Its 3Q09 net profits were dragged down by a $2.4m-loss from associated and JV companies, due largely to USI Holdings’ impairment charges of HK$235.4m for its strategic investments, mainly for listed equity securities. We estimate WT’s share of the losses to be about S$15.6m. Stripping out one-off items, core earnings actually grew by 685% qoq.

Ascentia Sky at Alexandra Road is expected to be launch-ready by June. WT may have to make a total writedown of $43.4m due to Ascentia Sky and Anderson 18. We think that making the writedowns this financial year would allow WT to launch a portion of their projects at current market prices to generate cashflow, and possibly still book in profits in subsequent periods as demand strengthens.

Despite the recent rally in its shareprice, we estimate that WT’s prime landbank has a price-implied Gross Development Value of just $1,160 psf. This is despite the fact that about 56% of its attributable GFA is for high-end developments, comprising prime sites like Le Nouvel Ardmore, Anderson 18 and Belle Vue Residences.

We have lowered our FY09-10 forecasts by 19% and 11% respectively, mainly due to adjustments in profit recognition and lower contributions from USI Holdings. We still like WT for its undervalued landbank and low net gearing of 0.5x. With the re-rating of property stocks, its current 41%-discount to NAV should narrow. Maintain BUY with a target price of $1.47, pegged at a 25%-discount to its RNAV.

Ascott Residence Trust – Rights issue punitive against backdrop of rising bond yields

The market of today looks beyond the dilutive effects of rights issues and focuses on the future acquisition growth prospects brought about by stronger balance sheets. Facing falling asset values and relatively high gearing ratio compared to the S-REITs, ART could consider equity- raising. However, reaction towards rights issue by ART may not be as desirable compared to its sister REITs.

Assuming ART raises S$412m based on a 40% discount to its last trading price, an estimated 981m rights units have to be issued. This will dilute FY10F DPU from 6 cts to 3.3 cts, after interest costs savings. The implied yield of just 4.8% appears unattractive compared against the rising bond yields, though gearing should lower to just 10%, assuming all proceeds are used to pay off debts.

In contrast to its sister REITs, we expect undesirable reactions to a rights issue; Firstly, earnings volatility are greater for hospitality REITs. Hence, earnings risk will exacerbate DPU dilution. Secondly, as 45% of debt outstanding are Yen-denominated, paying down low-cost debt with higher-cost equity does not make economical sense. Lastly, ART does not have major refinancing needs until 2011.

According to the management, China, its 2nd biggest market as of 1Q09, continues to face intense competition. Its Singapore market has benefited from recent marketing activities as reflected in higher occupancies of ~70% (vs 50-60% in 1Q09), but REVPAU is subdued due to lower room rates. Vietnam, its largest market which targets the long stay segment, continues to show stable performance.

We would look beyond the higher than average gearing and are believers in ART’s ability to manage its balance sheet and refinance. Recent announcement shows a director still buying at around the $0.68 level. Our current estimates are relatively conservative and we believe the market has already discounted the earnings decline in FY10F, implying upside from earnings upgrade. Reiterate Buy.

ParkwayLife REIT: Higher rent from Singapore properties boosts 1Q09 results

1Q09 results in line with expectations. PREIT achieved 1Q09 DPU growth of 16.6% YoY to 1.89 S¢. Topline rose 37.6% YoY to S$16.3m, boosted by higher rental from its Singapore properties and contribution from its Japan assets (S$3.7m) which it had acquired in 3Q08. Its Singapore properties enjoyed higher rentals due to the higher rental growth rate of CPI+1% in the second year of the lease. Although it incurred higher property expense for its Japan properties, 1Q09 NPI grew 36.6% YoY to S$15.2m. The committed occupancy for its properties remained at 100% across its portfolio.

Low gearing of 23.0% and no immediate refinancing risks. PREIT is cushioned against immediate refinancing risks, as the next refinancing requirement will be in 2H10. Its low gearing of 23% means it has the flexibility to take on some more debt for future acquisitions (about S$300m debt before it reaches a gearing of 40%, and about S$990m before it hits 60% gearing).

Management had indicated that Singapore will remain its core focus, but it does not rule out seeking acquisitions in countries like China, India or Australia, for mature assets that are yield Positive over long term prospects. Despite the current economic recession and the expected contraction in Singapore’s GDP, the long term prospects for PREIT is positive, underpinned by the expected continued growth in demand for premium healthcare in Asia.

Maintain BUY with target price of S$1.01. We are keeping our DDM value assumptions of no new acquisitions and cost of equity of 8.7%. Although PREIT’s dividend yields are not as attractive as the other REITS in the sector (~ 9% vs sector of ~ 11%), we remain positive on PREIT, for its defensive nature and the revenue downside protection that its lease structure offers. Maintain BUY.

City Developments - Sell: Stock Ahead of Fundamentals

1Q09 Results Look Light — City Dev reported 1Q09 net profit of S$83.1m, down 50% yoy and 17% qoq. This makes up about 15% of our FY09 estimates and 18% of consensus. The decline was largely attributed to the property development segment and hotel operations. Share of after-tax profit from associates fell 69% due to completion of St Regis Residences and The Sail.

Property Development Main Contributor — Property development accounts for 58% of 1Q09 PBIT of $119.3m despite falling 56% vs. a year back. Projects that contributed include City Square Residences, Botannia, One Shenton, Cliveden & Tribeca. PBIT from hotel operations fell 60% yoy at the back of slump in RevPar, while PBIT from rental properties managed an increase of 47% on improvement in occupancy and rental rates from a year earlier. However, portfolio occupancy has fallen from 94% in 4Q08 to 91% as at 1Q09.

Project Updates — More than 250 units of the 336-unit The Arte have been sold to-date and City Dev will prepare to launch the former Hong Leong Garden Condominium by 4Q09. On the South Beach development, City Dev & its JV partners are said to be in the final stages of negotiating for re-financing of its land and will review and refine plans given its 2016 completion timeline. Construction costs are expected to ease as well.

Sell, TP S$6.28 — Stock has run a massive 98% from its Mar-09 trough and is now trading at a 35% premium to our RNAV of S$5.98 and at 32% to its latest book value of S$6.11. We think a hefty premium is not justified until some pricing power on the physical market returns. Maintain Sell, TP S$6.28.

MacarthurCook Industrial REIT

Net Property Income (NPI) for FY2009 registered an increase of 48.5% to $36.9 million. DPU for the full year is 8.925 cents.

Actual NPI is not far off from our estimates of $35.2 million. However DPU is 7.2% lower than our estimates. Fourth quarter DPU was 1.875 cents, which was 20% lower than the three preceding quarters of 2.35 cents, even though the fourth quarter DPU comprised retained distributions from first quarter through third quarter. Asset value declined 4.5% from $555.4 million in FY2008 to $530.3 million in FY2009. In addition, MIREIT took a $20 million provision to its balance sheet as it anticipates the decline in asset value of the IBP development building it will acquire upon completion of construction in fourth quarter 2009. NAV per unit fell from $1.29 in FY2008 to $1.09 in FY2009.

MIREIT got a second extension on its debt to repay $201 million, extended to 31 Dec 2009 with an interest margin of 5%. It has another 1.5 billion JPY due on 18 Dec 2009. Furthermore it still requires funding of $91 million for the IBP building. Current gearing is 41%. If the IBP building is to be debt-funded, gearing will rise to 47%.

Although MIREIT has gotten an extension on its debt, the funding need is still present and pressing. Other than obtaining a straight bank loan, the other alternatives would be divesting assets or a equity fund raising. Selling assets in a value declining environment would not value eroding. We believe a rights issue is imminent and although highly dilutive, is the best solution to its funding needs from a long-term viewpoint. We estimate MIREIT would need to raise $100 million to fund its IBP acquisition. Gearing would also be lowered to 35%, which is a comfortable level. In our calculation, we assume a 1-for-1 rights, which would approximately doubles the issued units.

MIREIT has maintained an occupancy rate of 98.6% as at 31 March 2009. We retain our top line assumptions, however we adjusted our borrowing cost to reflect the higher margin. We adjusted down our DPU forecast for FY2010F from 8.59 cents to 8.28 cents. If MIREIT raises equity through a rights offer, DPU would be diluted to 4.24 cents. MIREIT’s share price has recovered in-line with the market, however we feel investors are still unclear of the refinancing plan and that will bog down investment sentiments in the REIT. We retain our Hold recommendation with a revised fair value of $0.39 as we lower our beta and increase cost of debt assumptions. We believe a re-rating is due for the REIT sector as most REITs had resolved their short term funding needs.

Bukit Sembawang Estates (S$3.59) - Focus on inherent value again

The successful launch of The Verdure has given us optimism that management is finally taken steps to realise the inherent value of its inventory. BukitSemb has 5m sf of low-cost landbank. Balance sheet and cash flow are set to improve significantly after its rights issue and successful new launches. The stock has been a laggard in this rally vs. purer residential developers, trading below its historical P/BV of 1.5x. We lower our FY10-11 core EPS estimates by 32-86% on the back of deferred earnings from Paterson Suites, Fairways Condo and St. Thomas Walk as we expect these projects to enter the market later. We also roll forward our RNAV to CY10 and lower our RNAV estimate from S$6.45 to S$5.54, after factoring in dilution from the rights issue as well as higher ASP assumptions. In addition, we reduce our RNAV discount from 40% to 25% to reflect mid-cycle valuations. All in all, our target price rises from S$3.87 to S$4.15. With a considerable low-cost landbank and exposure to the resilient upgraders' market, we believe BukitSemb will benefit from the ongoing volume spurt in the physical market. Upgrade from Underperform to Outperform.

CapitaMall Trust is confident of achieving DPU of 8.4 cents in FY09

· Performance in 1Q09 was disappointing as consumers shy away from shopping malls despite the festive Chinese New Year season. However, shopper traffic and retail sales have bottomed since Feb 09 and has picked up in Apr and May 09. Negative growth has narrowed. In general, basic and necessity goods have fared much better than luxury items.

· CMT has put in a lot of efforts to assist tenants to cope with the difficult times. Measures include advertising & promotional campaigns and activities, free parking and providing extra discount with usage of CapitaCard (a tie-up with DBS). CMT has resisted efforts by some tenants to ask for rental rebates but such pressure has eased in recent days.

· CMT achieved occupancy of 99.5% in 1Q09, which is impressive as there is no visible impact from the economic turmoil. CMT benefitted from a flight to quality to well located malls. Renewal and new leases for 169,233sf of space signed in 1Q09 were 1.3% higher than preceding rental rates. CMT's core tenants are professional players with long-term plans for the Singapore market. Top tenants include BHG, Cold Storage and NTUC Fairprice.

· We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic is heavy. There were no visible vacant shops at any of the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09.

· We were particularly impressed by Plaza Singapura where there was a X-ploring Dino Trails exhibition organised by Agency for Science, Technology and Research (A*STAR). There were at least three moveable life-size dinosaurs at the central podium. Kids were excited and busy asking parents to take pictures for them (imagine the bonding between parent and child). There were four free workshops, namely Mini Fossil, Flapping Pterosaur, My Walking T-Rex and Dino Timeline. There is a full-size skeleton of Tyrannosaurus (T-Rex) outside the mall near The Atrium. At IMM Building, shoppers were given S$100 vouchers from a mix of retailers and a goodies bag (cost just S$1 each) for every purchase of S$150 and above. Thus, a long queue at the redemption counter.

· CMT relies on the CMBS market for the bulk of its funding (CMBS: 54.7%, floating and fixed rates notes: 13.7%, convertible bonds: 31.0% and bank loans: 0.6%). CMBS is well suited for CMT given CMT's size and the quantum of funding required. CMT has previously issued CMBS with tenure of up to seven years. Management is looking at tapping on the CMBS market in Asia. Potential investors include insurance companies, pension funds and fixed-income funds, including institutions in China.

· Banks are continuing to ask for wide credit spread. Credit spread remains unchanged at 250-350bp for loans with tenure of three years. Foreign banks have been quiet, especially for European banks. CMT does not have any requirement for refinancing in 2009. It has borrowings of S$440 due in 2010, with the bulk of S$315m due in Apr 2010. Gearing was reduced from 43.1% to 29.2% post 9-for-10 rights issue. Moody's Investors Service has reaffirmed corporate rating of A2.

· Management targets to commence enhancement works for Jurong Entertainment Centre (JEC) by end-09. The mall has been closed since Nov 08. CMT has secured permission to increase the plot ratio for JEC from 1.85 to 3.00, more than doubling NLA to 209,700sf. The reconstructed mall will have an Olympic-sized ice skating ring. CMT has secured pre-commitment from anchor tenants for 50% of NLA (cinema, food court and supermarket). Construction cost is estimated at S$150m and the AEI is scheduled for completion in 2H 2011.

· CMT is also in talks with the authorities on the integration plan for Plaza Singapura and The Atrium and targets to start work by end-10. The integration of the two malls will create 170m of prime retail frontage along Orchard Road and a combined NLA of over 850,000sf. Up to 150,000sf of retail NLA will be created by decanting (or converting) lower-yield office space into retail sapce. Traffic flows from Dhoby Ghaut MRT station will be improved with interconnections between Plaza Singapura and The Atrium.

· We expect management to focus on organic growth through asset enhancement initiatives in the foreseeable future. In terms of expansion plans, management will continue to focus on family-oriented malls in Singapore. We believe management will be selective when evaluating acquisitions, pursuing only yield accretive deals.

Management is confident of achieving DPU of 8.4 cents in FY09, a forecast given during the 9-for-10 rights issue.

CapitaLand and Australand in A$300m redevelopment deal

Through a joint venture with Australian property group, St Hilliers, Australand will be embarking on a A$300m (S$347.3m) public housing redevelopment project in Carlton, Victoria, that spans 7.5 hectares across three sites. The project will involve replacing 192 old walk-up flats with over 240 public and social housing apartments and 500 inner city residential homes. Marketing of the homes will begin in mid-August, and prices will start from high A$200,000, and the project is expected to bring in sales of over A$300m.

The redevelopment project will be delivered in seven stages over the next eight years to enable the consortium to re-use capital as stages are completed, to enhance capital efficiency. Construction is scheduled to start in November and the redevelopment project should be ready in 2017. The impact on Australand's share price is about two Australian cents a share. The impact on CapitaLand's RNAV and target price is minimal.

Parkway Life REIT – No major refinancing risks until 2HFY11

PREIT posted a 16.6% rise in 1Q09 DPU to 1.89 cts (annualized yield of 8.7%). Gross revenue jumped 37.6% yoy to $16.3m, with the additional rent from the Japan properties contributing to 83% of the growth. Revenue growth was also driven by an upward revision of rents at the Singapore hospitals by 6.25% for the 2nd year of the lease, which started from Aug 08.

The net property income (NPI) margin remained stable at 93% despite higher expenses incurred for the Japan properties. This is a result of its properties being leased on a triple net basis, in which the lessees bear all property operating expenses. Distributable income grew a milder 16.6% to $11.4m as a result of higher financing cost due to acquisitions of the Japan properties in 2Q08 and 3Q08 being debt-funded.

Major refinancing risks will not kick in until Sep/Oct-2011. PREIT’s entire debt portfolio of $247.5m has a weighted average tenor of 2.4 years. Its effective interest cost of 2.89% is one of the lowest in the sector and is fixed for the next three years. Its low gearing of 23.3% leaves a debt headroom of $305.m before the 40%-gearing level is reached.

There is still potential for asset enhancement initiatives at its under-optimized pharmaceutical product distribution and manufacturing facility in Japan, which would not burden its balance sheet while providing a little upside to earnings. Otherwise, we should expect flatter yoy growth from the next quarter on, given the diminished effect of inorganic growth.

We believe PREIT is on track to deliver our forecast DPU of 7.1 cts as 93% of its leases are structured with downside protection to rent revenues. Our earnings estimates remain intact while target price has been raised to $1.09 from $0.94 to reflect the easing equity risk premium over the past 6 weeks. Maintain BUY.

City Development and Nan Fung Group invests in South Beach project

Hong Kong developer Nan Fung group has emerged as an investor in Singapore's South Beach project. It will subscribe to $205 million of five-year secured convertible notes under a refinancing exercise for a $1.2 billion loan on the 3.5-hectare site. The plot was sold for almost $1.69 billion in 2007 during the property bull run to South Beach Consortium - a joint venture company equally owned by subsidiaries of City Developments Ltd (CDL), El-Ad Group and Dubai World.

A fully owned unit of CDL will subscribe for $195 million of the notes, with entities associated with the Nan Fung group of companies taking the rest. The notes may be converted into equity in the joint venture company any time during their five-year duration, subject to conditions and terms that have not been disclosed. If CDL converts its notes, it will emerge as the leader of the consortium. And if Nan Fung follows suit, it will become a shareholder in the consortium.

The $800 million secured term-loan facility announced yesterday has been provided by a syndicate comprising DBS Bank, United Overseas Bank, OCBC Bank, The Hongkong and Shanghai Banking Corporation and Sumitomo Mitsui Banking Corporation (Singapore Branch). These five banks plus Bank of Tokyo Mitsubishi provided the initial $1.2 billion bridging loan facility.

The project, designed by London-based Foster + Partners, will comprise two tower blocks and four conserved buildings housing offices, luxury hotels, retail space and residences. In late 2007, CDL said that the project would cost some $2.5 billion in all, including the land cost. CDL will take a leading role developing the South Beach project, which is on track to be completed by 2016, yesterday's statement said. Talk surfaced last year that El-Ad and Dubai World were keen to offload their stakes in the project. However, the two yesterday confirmed their commitment to South Beach. The consortium's winning bid of $1.69 billion for the plot in the public tender worked out to $1,069 per square foot of potential gross floor area and was reported to be about $500 million lower than the top bid, which was not even short-listed under the two-envelope evaluation system.

KSH Holdings: Living on past order books

YoY earnings growth, ex non cash items. In FY09, KSH’s revenue jumped 80.6% YoY from S$176.5m to S$324m, which was within our expectations. This is attributable to the significant increase in revenue contributed by construction business in Singapore, which accounted for 98.6% of revenue. Gross profit margin remained relatively stable at 10.4% in FY09, similar to FY08 levels. PATMI came in at S$14m, down 55% YoY from S$31.4m in the previous year.

Stripping away non cash items such as revaluation gains or losses of investment properties, fair value gain of embedded derivative on convertible notes and imputed interest on convertible notes under interest expense, PATMI would have surged from S$5.8m in FY08 to S$17.2m in FY09. Doubtful debts expense increase. KSH’s doubtful debts expense jumped from S$0.081m in FY08 to S$0.765m in FY09. Upon checking with management, approximately 90% of the doubtful debts expense is due to delays from China’s customs to return deposits placed with them previously.

Fair value loss on investment properties. KSH recorded a fair value loss of S$3.8m on its investment properties in FY09 versus a gain of S$43.5m the prior year. This is unsurprising given the negative sentiment on the property market in FY09 versus FY08. Final dividend of 2 S¢ declared. KSH has declared a final dividend of 2 S¢ per share for FY09. In addition to the previously declared interim dividend of 1.5 S¢, dividend yield works out to 12.3%.

Competition to heat up? In response to our query on whether competitors are slashing margins in order to win projects, KSH management said they have yet to see that. Going forward, management will capitalise on KSH’s A1 grading under CW01 category for general building to tender for government projects of unlimited value. This is a move to restrict competition (about 40 contractors are currently awarded the A1 grading), as well as to ensure collection of payments.

Maintain NEUTRAL. We are revising our FY10 earnings slightly down by 1.1% to S$14.5m (- 55.4% YoY), while introducing our FY11 earnings estimates at S$13.6m (-6.4% YoY), in view of a lack of earnings visibility with the economic downturn. We have assumed the conversion of the warrants that KSH has issued will take place equally over the current three year. Applying a P/E multiple of 5x FY10 earnings (peers trading at 8x), we arrive at a target price of S$0.29 (previously S$0.11). Maintain NEUTRAL.

City Development - Successful refinancing, but increases company's involvement

Successful refinancing of a land-acquisition loan for South Beach removes some risk, but has seen City Developments (CDL) provide debt and (potentially) increase its equity stake. The stock already appears to be pricing in a strong recovery in the Singapore property market, limiting potential upside. The banks’ willingness to refinance a lesser amount than was originally made available to the project is another reminder of the weakness in the commercial property sector.

South Beach refinanced. City Development’s (CIT SP - S$9.1 - U-PF) 33%-held joint venture project, South Beach, has successfully re-financed its S$1,200m debt. The loan was originally taken to finance the project’s S$1,688m land-acquisition cost. A consortium of commercial banks is providing S$800m of the S$1,200m refinancing. This is less than the S$1,200m that the banks provided when the loan was first taken. The rest of the refinancing is funded through the issuance of S$400m worth of five-year secured notes convertible into equity in the project, with S$195m of these taken by CDL itself. The balance is being taken up by the HK-based unlisted property group, Nan Fung. The refinancing cost or convertible price related details have not been disclosed.

One of the better solutions. Investors had been worried about the success of this refinancing as the land transaction for this rather large project (project cost at S$2.7bn) was done at the peak of the property market. This refinancing structure is one of the better solutions, as CDL avoids taking the project on its balance-sheet (would have increased reported gearing substantially), and the project value has not be written down.

Higher CDL involvement. We note that this refinancing was possible with CDL having to increase its involvement in the project, currently by way of providing debt, and later by potentially increasing its equity stake, should the debt be converted into equity. Interestingly, the other two equity partners in the project, El-Ad Group and Dubai World, have not subscribed to the convertible note.

Reiterate Underperform rating. Overall, we reaffirm the view that CDL’s stock is already pricing in a strong recovery in the Singapore property market, limiting upside potential. See our Where is the upside note of 4 June for more details. That the banks are willing to refinance a lesser amount than what was originally made available to the South Beach project, is just another reminder of the weakness in the commercial property business.