Recapitalisation and refinancing woes peaking; signs of operating stability. We believe that capital raising for the SREIT sector has now peaked. Refinancing risk is abating on improving credit markets and as the bulk of debt maturing this year has committed funding. We expect steady 2Q results later month, with signs emerging that the sharpest declines may now be past. The sector is now yielding 8.4% for FY09E, implying an above average 570bps spread over the risk-free rate. Buy AREIT and Suntec REIT.

Balance sheets strengthened; initial signs of credit market recovery. The REITs have raised S$3bn YTD, which will lower avg sector gearing to 28%. Cash calls are likely to slow. Smaller REITs with above-average gearing (MIREIT, Saizen) or those positioning for acquisitions (CRCT, ART) remain candidates to raise capital. We estimate that ~S$0.8bn of debt maturing in 2H09 requires refinancing, and this increases to S$2.3bn in 2010. The availability of credit from banks has improved, as seen by recent refinancing deals. Lending spreads (while still elevated) have stabilized or even tightened. Issuance of notes under MTN programmes has picked up again, but still in relatively small tranches (S$20-70m).

2Q results likely to be steady with signs of improvement at the margin. We expect generally steady 2Q operating results later this month with flat to positive lease reversions. Some revaluation deficits are likely to be reflected. Our channel checks suggest some modest improvement over the past 2 months. The pace of deterioration in office rents has moderated (JLL estimates 11% fall in 2Q Grade A rents to S$9.50psf vs. a 28% decline in 1Q) with a pick-up in leasing deals and tenant enquiries. Retail sales and visitor traffic for CMT's malls have picked up in April/May as consumer confidence improved. Industrial landlords have also seen enquires recovering slightly and the rental deterioration slowing. We expect the sharpest declines for office rents, and retail/industrial to be more resilient.

Acquisition and asset enhancement growth relatively muted. We do not expect acquisitions to return until next year, and most asset enhancements are likely to remain deferred. Comments from REIT managers suggest there are few distressed assets available in Singapore. Asset yields are likely to edge up as competition for assets diminishes and funding costs still remain elevated (3-year SOR is 2.1% and spreads are 250-300bp).

Top picks AREIT, Suntec; risks. S-REIT yields have compressed sharply after the re-rating and dilutive cash calls, but still offer an above average spread. We expect shareholder returns to be underpinned by relatively stable dividends and a normalizing yield spreads. The SREIT sector is currently yielding 8.4% CY09E and 8% CY10E, and trading at avg 0.6x P/B. Despite the recent spike in long bond yields, implied FY09E spread of 570bps is still significant and above historical avg. We continue to like AREIT for its defensive, well diversified portfolio and development capability which we view as a key competitive advantage as well as Suntec for its undemanding valuations. We value the REITs using a DDM methodology. Risks: refinancing and recapitalization, prolonged economic slowdown affecting leasing demand, competition from new supply.