REIT - window of opportunity for equity fund raising

We see a window for FCT, MCT, MINT, CMT and Plife now given more favourable valuations, though depending on acquisition timing. Meanwhile, low P/BV for K-REIT and Suntec may be inhibitive. Maintain Overweight on S-REITs on positive yield-spread. Top picks remain CDLHT and CCT.

What Happened
Cache recently completed a S$57m placement, priced at the top end of the pricing range. News of IPOs such as M&L REIT also point to improved sentiment. These have spurred questions about whether others will follow suit.

What We Think
We think that the recent news flow point to the opening of a window of opportunity for equity fund-raising. Candidates wishing to catch this wave should possess:
i) recent share price appreciation and/or P/BV of near or above 1x;
ii) pipeline assets for acquisition, and, of course,
iii)the need for equity fund-raising for acquisition.

We think Cache’s case was likely
aided by the small quantum of equity fund-raising, share price outperformance and pipeline assets for acquisition. While most of their pipeline assets are not ready for injection in the near-term, we see a potential window for FCT, MCT, MINT, CMT and Plife. ART, FCOT, K-REIT and Suntec are also expected to come to the market given their high gearing and/or pipeline assets for acquisition, though we think further share price performance is required before accretive acquisitions can be made. We believe that such equity fund-raising could offer a cheaper entry for investors looking to partake in these REITs.

What You Should Do
Maintain Overweight on REITs. Our top picks remain CDLHT and CCT for portfolio upside and strong balance sheet

Catching the wave
We think that recent market news flow point to the opening of a window of opportunity for equity fund-raising. Candidates wishing to catch this wave should possess:
i) recent share price appreciation and/or P/BV of near or above 1x;
ii) pipeline assets for acquisition, and, of course,
iii) the need for equity fund-raising for acquisition.
We think Cache’s case was likely aided by the small quantum of equity fund-raising, share price outperformance and pipeline assets for acquisition.

We previously highlighted ART, FCOT, K-REIT and Suntec as having weaker financial metrics and as possible candidates for near-term cash calls in our piece “REIT – Still Safe” in Nov 11. While a share-price recovery may ease cash calls to fund acquisitions, we think more may be needed given the still fairly-low P/BV (of 0.6-0.7x for the office S-REITs and 0.8x for ART), which could inhibit accretive acquisitions. Low pre-commitments of about 60+% at MBFC Tower 3 coupled with a contentious acquisition of OFC by K-REIT should add to these difficulties.

Meanwhile, though most of their pipeline assets are not ready for injection in the near-term, we see a window for FCT, MCT, MINT, CMT and Plife on more favourable valuations. Particularly, Changi City Point (FCT) is still in the final stages of construction (expected to be completed by end-2012) while physical occupancy at Mapletree Business City is still at a low 70+% (notwithstanding fairly high pre-commitments of >90%).