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17 February 2009
Singapore REITs
Recapitalisation pain,
restructuring gain
Gregory Lui, CFA
Strategist
(65) 6423 5958
gregory.lui@db.com
Elaine Khoo
Analyst
(65) 6423 6435
elaine.khoo@db.com
Fundamental, Industry, Thematic, Thought leading
Deutsche Bank Company Research's Research Product Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. The viability of the REIT
model in a deep recessionary environment is in doubt. Using the experience of
mature REIT markets as a useful guide, we map the likely evolution and
repositioning of the Asian REIT model, and introduce a framework for identifying
the long-term winners and losers.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
CMT (CMLT.SI),SGD1.30 Buy
Ascendas Real Estate (AEMN.SI),SGD1.29 Buy
Suntec REIT (SUNT.SI),SGD0.61 Buy
Mapletree Logistics Trust (MAPL.SI),SGD0.40 Buy
Companies featured
CMT (CMLT.SI),SGD1.30 Buy
2008A 2009E 2010E
P/E (x) 21.8 9.7 10.0
Yield (%) 5.1 10.9 10.6
Price/book(x) 0.6 0.5 0.5
Ascendas Real Estate (AEMN.SI),SGD1.29 Buy
2008A 2009E 2010E
P/E (x) 18.9 10.6 10.0
Yield (%) 5.7 11.9 10.6
Price/book(x) 1.3 0.8 0.8
Suntec REIT (SUNT.SI),SGD0.61 Buy
2008A 2009E 2010E
P/E (x) 23.2 7.6 8.0
Yield (%) 8.5 15.9 14.6
Price/book(x) 0.3 0.3 0.3
Mapletree Logistics Trust (MAPL.SI),SGD0.40 Buy
2008A 2009E 2010E
P/E (x) 11.9 7.8 8.1
Yield (%) 9.6 13.4 12.9
Price/book(x) 0.4 0.4 0.4
SREIT forward dividend yield band
50
100
150
200
250
300
350
400
Jul-02
Jul-03
Jun-04
Jun-05
May-06
May-07
Apr-08
DY 15.0%
DY 8.0%
DY 5.0%
DY 4.0%
DY 6.0%
SREIT forward dividend yield & spread
0 2
4 6
8
10
12
14
16
18
Jul-02
Apr-03
Dec-03
Sep-04
May-05
Feb-06
Oct-06
Jul-07
Mar-08
Dec-08
0 2
4 6
8
10
12
14
16
Forward dividend yield (%) 18
Spread (%)
"This report changes ratings, price targets,
and/or estimates for several companies
under coverage. For a detailed listing of
these changes, please see the individual
company sections inside"
Fundamental: we reassess the viability of the REIT model
Most S-REITs were listed during a real estate boom and easy credit markets. This
created an overdependence on fresh capital and spawned unsustainable
structures. As market conditions turned, the REITs have been unable to raise
funds to grow and have de-rated rapidly. While we believe that REITs remain
relevant as a vehicle for tax-efficient, inflation-hedged income delivery, the
business models will likely need to be repositioned to survive a deep recession.
Industry: learning from other mature market downturns
As reference guides, we use the US and Australian REITs during the 2001 dot-com
bust, the S&L crisis and the LPT crisis in the early 1990s. Key lessons: 1) balance
sheet mismatches are the greatest cause of wealth destruction, 2) downturns are
followed by a period of M&A activity and distressed asset opportunities, and 3)
REITs have adapted to an environment of scarcer capital.
Thematic: the road map for the sector – four steps to reposition the model
1) The recapitalisation phase is likely to continue in the near term as credit markets
remain tight and asset prices decline; this is likely to overhang the sector. 2)
Restructuring via M&A or internalising management could also follow. 3) Business
models will likely be repositioned. REITs need to be weaned from dependence on
fresh capital, and managers should focus on active management and capital
recycling. 4) As the cycle turns, distressed assets could find their way into the
public domain via listing or be acquired by existing REITs.
Thought leading: we identify through-the-cycle players, pricing anomalies
Drawing on the experiences of other mature markets, we look for the long-term
survivors who are best placed to ride out the cycle and dominate growth
opportunities as the cycle turns. We introduce a framework to assess the viability
of platforms, the ability to grow asset values, the sustainability of balance sheets,
the robustness of business models and the strength of sponsors. We stress test
balance sheets to determine how much capital destruction is likely and whether
recapitalisation risks have been priced in.
Our top picks: AREIT and CMT as long-term through-the-cycle players
The sector is yielding 14.0% on FY09E, a 1,207bps spread over the 10-year bond
and a 53% discount to book NAV. CMT and AREIT stand out with the attributes of
through-the-cycle players. In the near term, recapitalisation is likely to overhang,
while restructuring should be more positive for the sector. Risks: inability to
refinance, worsening credit market conditions, the recession affecting rentals,
credit risk of tenants, and higher-than-expected financing costs.
Table of Contents
Executive summary ........................................................................... 3
Repositioning the Singapore REIT model..................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
Evolution of the Asian REIT model .................................................. 4
A fall from grace........................................................................................................................4
Is the REIT model in Asia still relevant? ....................................................................................6
Fixing the REIT model ....................................................................... 8
How does the model evolve from here?...................................................................................8
1. Recapitalisation of balance sheets........................................................................................8
2. Restructuring: M&A opportunities; internalisation of management....................................10
3. Reposition business model – reduces the need for new capital.........................................12
4. Return of distressed portfolios to market ...........................................................................13
Looking for through-the-cycle players........................................... 15
Identifying sustainable REIT models .......................................................................................15
Balance sheet sustainability ....................................................................................................15
Asset management.................................................................................................................19
Acquisition platform................................................................................................................21
Significant asset price/rental compression reflected ..............................................................21
CapitaMall Trust – Dominant retail landlord ............................................................................28
Ascendas REIT – Steady industrial REIT..................................................................................29
US REIT lessons – Boom to bust to boom..................................... 31
Key observations....................................................................................................................31
Multiple cycles of growth .......................................................................................................31
The initial years – 1960s..........................................................................................................32
US REITs in the 1970s to 1990s – boom to bust and recovery...............................................33
1990s – Savings and Loan Crisis, REIT IPO boom, and the modern era of US REITs.............35
US REITs in the 21st century; industry consolidation and M&A...............................................37
Australia’s lessons – A-REIT market .............................................. 43
Key takeaways and implications for Asia ................................................................................43
Rapid growth funded by cheap capital....................................................................................43
Initial growth phase of Australian REITs..................................................................................43
Changing business models; industry consolidation ................................................................44
Development of Asian REITs .......................................................... 46
Background............................................................................................................................46
Risks to Investing in Reits............................................................... 49
Appendix A: Typical REIT structure ............................................... 50
Appendix B: Snapshot of rents and capital values....................... 51
Ascendas Real Estate ...................................................................... 52
CMT................................................................................................... 54
Mapletree Logistics Trust ............................................................... 56
Suntec REIT...................................................................................... 58
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