Good Report from Goldman Sachs

REITS: Defensive with increasingly attractive valuations

While the organic growth driver for REITs continues to power ahead, we have near-term concerns on the acquisition growth driver. When we launched our REIT coverage in January, we forecasted for the 9 REITs we cover to make S$15bn worth of acquisitions within a 3-year time frame thereby boosting portfolio sizes by around 75%. Based on announced acquisitions, we note that YTD, our 9 REITs have made S$3.9bn worth of acquisitions, which is 27% of our 3-year acquisition target. Going forward, we continue to see Singapore REITs growing via acquisitions so as to stand out in an increasingly crowded REIT market. We note that amidst the global credit crunch, REITs may, in the near-to-medium term, find: (1) greater difficulty in accessing capital to finance transactions; and (2) higher costs of equity and debt. We estimate that compared to June, the borrowing costs for REITs would have gone up by around 50bp such that borrowing costs today from the domestic lenders may be closer to 4%. We explicitly factor in the near-term greater uncertainty of support and higher cost of funding from credit markets into lowering the contribution from the acquisition growth driver for our REITs. While we are confident in REITs growing to meet their acquisition targets over the next 2-3 years, we lower the amount of acquisition premium we use in setting the respective target prices for our 9 REITs due to greater uncertainty relating to execution on growth via acquisitions. The acquisition premium is an adjustment factor we use to reflect our confidence in the company making its targeted level of acquisitions at the estimated yield accretion. By paying out all or most of its distributable income, REITs need to tap capital markets to finance acquisitions. Current market volatility will impact the near-term ability of REITs to access capital market funding. Nonetheless, we see REITs as quality borrowers having the necessary debt capacity and expect that equity markets to be willing to fund good acquisitions.in the prevailing choppy equity markets. We believe the market is under-appreciating the defensive qualities and overstating risks. REITs were sold down recently despite no change in the positive fundamentals for the Singapore property market or government risk free rates. In a flight to quality environment we like REITs for their: (i) low gearing, typically 40%; (ii) income payout, often of 100%; (iii) secured leases; and (iv) limited development risk. Given reduced risk tolerance, we favor those REITs: (a) with strong organic growth; and (b) trading near or below RNAV. While we see challenging conditions for REITs to access capital market funding for acquisitions, we believe the risk is overstated and we note that base case valuations are attractive.

Temasek Holdings, an Asia investment firm headquartered in Singapore, owns the entire issued share capital of the Trustee-Manager. Temasek fully supports CitySpring's aim to position itself as a leading player in a growing sector, by achieving significant growth through acquisitions.

As a wholly-owned indirect subsidiary of Temasek, the Trustee-Manager is able to draw on Temasek's international reach and business network in sourcing for acquisition opportunities.

Temasek has a dedicated internal team drawing on relevant infrastructure expertise to assist CitySpring in identifying acquisition opportunities. It intends to co-invest in infrastructure assets with CitySpring where Temasek deems it appropriate.

Temasek intends to enhance CitySpring's pipeline of acquisition opportunities by acquiring infrastructure assets that may be at an early stage where they have not yet generated regular and predictable cash flows that would otherwise make them suitable investments for CitySpring. Temasek may extend an opportunity to CitySpring to acquire these assets when Temasek considers them more mature and suitable for CitySpring's investment mandate, subject to mutual agreement between Temasek and the Trustee-Manager, and approval by CitySpring's Unitholders where required, and Temasek will abstain from voting on the relevant transaction where required.

Infrastructure and utility stock are long term and stable plays. Not meant for trading