REIT performance

Following the strong bull run in S-REIT last year, the bull run is now showing some signs of tiredness. Nevertheless, SREIT continued to beat the broad market (4.6%) by a margin year-to-date, registering price return of 5.2%.

S-REIT P/B ratio of 1.14 lingered around +2 STD (1.15) for the past three months and had struggled to break above it. On the yield spread, the increase in 10-yr government bond yield may provide less scope for yield compression going forward. In comparison with other developed REIT markets in Asia Pacific region and USA, S-REIT yield spread and forward dividend yield remain appealing for income investors.

Recommendation

We believe that PLife REIT would benefit from elevated inflation as its Singapore property portfolio (64% of gross revenue) has annual rental revisions that are pegged to 1% above the increase in CPI level.

The trust also has a sizeable portfolio in Japan (33 nursing homes and medical facilities) that is undergoing Asset Enhancement Initiatives (AEI) to enhance their value. With the retention of ~S$3mn for capital expenditure and “Refurbishment AEI” concept in place, we expect DPU to surprise on the upside in 2013. Besides organic growth opportunities, the trust is also well-positioned to acquire new properties with debt headroom of $175mn (based on gearing of 40%). We have yet to incorporate new acquisitions into our model. Therefore there could be potential upsides should there be any new acquisitions. By assuming that the trust acquires S$50mn of new property assets at NPI yield of 6% while interest cost at 1.62% in the second half of this year. The fair value can potentially increase from S$2.45 to S$2.53.

Source: PhillipCapital Research - 28 Mar 2013