4Q earnings steady. S-REITs within our coverage universe generally delivered a fairly steady set of 4Q CY08 results. The results were in line with our expectations, excluding LMIR Trust. CapitaMall Trust and Suntec REIT reported similarly marginal QoQ increases in distribution income of 0.3% and 0.6%, respectively. Frasers Centrepoint Trust experienced some disruptions from asset enhancement works at one mall, but its other properties enjoyed both earnings growth and strong occupancy levels. We believe this quarter's performance was not evidence of stability or invulnerability but more a function of timing lags. In fact, other indicators like reversionary rents - achieved office rents at Suntec City fell 11% QoQ - point to a different trend.

No big NAV shake-up yet. The same inertia played out in net asset values. Excluding FCT (year end: Sep); the other S-REITs carried out their annual property revaluations in 4Q CY08. CapitaMall Trust registered a marginal1.9% increase in property values over its last valuation in June 2008. Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. LMIR Trust also recorded a revaluation deficit, the bulk of which was driven by the adverse SGD-IDR movement over the year. Overall, we feel cap rates used by the independent valuers still do not fully reflect the downwards trend in capital values.

LTV is more important than reported leverage. Because of this timing lag, we believe reported balance sheet figures are under-estimating leverage and over-estimating balance sheet strength. In fact, the market is currently valuing these S-REITs on an average 61% discount to reported NAV. Lenders' appetite for loan-to-value have fallen because of both an expectation of falling capital values and a decreased appetite and capacity for risk.

Maintain NEUTRAL view. In our view, unit prices more than reflect the realities of falling capital values and refinancing risks. We feel the focus is now on how deeply S-REIT earnings will be affected by deteriorating economic conditions - and consequently what is the 'real' distribution yield. Meanwhile, we continue to believe S-REITs will need to re-capitalize their balance sheets. The recent equity fund raising announcements from blue- chips like Ascendas REIT (raising S$408m) and CapitaMall Trust (S$1.23b) have set the tone for the year. However, the sector is competing for limited resources - for instance, we believe rights issues would need to be underwritten in order to succeed. Once again, the strength of the sponsor (and the size of its stake) will make a difference.