27 August 2014
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Credit rating upgraded by S&P

  • Upgraded to A- by S&P
  • 40% gearing -> S$1.3b debt headroom
  • Likely to buy remaining 60% of CapGreen ahead


Long-term corporate credit rating upgraded to A- (stable)

Earlier this week, Standard and Poor‟s Rating Service (S&P) announced that it had upgraded CCT‟s long-term corporate credit rating from “BBB+‟ to “A-” with a stable outlook. The rating agency had reassessed CCT‟s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” In addition, the trust‟s risk profile has been reinforced by its stable business performance, consistent cash flows, high occupancies and an expanded asset portfolio with CapitaGreen‟s anticipated completion by end-2014. We note that CCT currently enjoys one of the highest credit ratings in the S-REITs sector – only below that assigned to CapitaMall Trust (A2) by Moody‟s.

Significant debt headroom of S$1.3b to 40% gearing

CCT‟s gearing stood at a healthy 28.8% as at end 2Q14 – down 1.2 ppt QoQ from 30.0% as at end 1Q14 – which is the lowest amongst its peer group of office S-REITs (average gearing of 36.0%). Recall that MAS regulations stipulate S-REITs without a credit rating are required to cap their gearing below 35% while those with a rating are allowed to go as high as 60%. CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b before it hits a 40% gearing level.

Likely to exercise call option on remaining 60% of CapGreen

Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own (50% owned by CapitaLand and 10% by Mitsubishi Asia). Assuming a valuation of S$2.5k to S$2.8k psf NLA for CapitaGreen, this will cost S$1.0b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.


Cambridge – CIMB

27 August 2014
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Acquisition amid a tight market

CREIT has just announced the proposed acquisition of 12 Ang Mo Kio Street 65 for a purchase consideration of S$39.8m. By funding this acquisition withdebt and cash on hand, the leverage ratio is expected to rise to 34.8% upon its completion. Consequently, DPU is expected to be boosted by c.2% in FY15. Onthe back of a tight acquisition market, we view this transaction positively, although the impact on earnings is expected to be limited. We maintain ourHold rating while our DDM-based (discount rate: 8.0%) target price rises slightly to S$0.78 as we price in the marginally higher earnings.

What Happened

Cambridge Industrial Trust (CREIT) has just announced that it has enteredinto a conditional sale and purchase agreement with Freshlane Pte Ltd in connection with the proposed acquisition of 12 Ang Mo Kio Street 65 for apurchase consideration of S$39.8m. The property is a 6-storey purpose-built light industrial building with a GFA of 16,762 sq m and a remaining tenure of36 years. Current occupancy stands at 85%, with two tenants, namely, Nepes Pte Ltd and Singapore Technologies Electronics Ltd.

What We Think

With a cap rate of 6.75% and an expected yield on cost of c.7% (at 100%occupancy), the valued paid for this property is in line with the weighted cap rate of CREIT’s recent valuation (6.5-6.9%). With this acquisition expected tobe fully funded via cash on hand and debt, we believe there will be no capital-raising. Consequently, we expect this acquisition to be yield-accretive, adding 2.1% to FY15 DPU and 2.2% to FY16 DPU, with a leverage ratio of 34.8% upon completion. Given this, together with the strong tenants currently on the property, we view the proposed acquisition positively, although given the value of this asset and the fact that the acquisition will only be completed in 3Q14, the impact on FY14 earnings should be minimal.

What You Should Do

CREIT is offering dividend yields of 7.0% for FY14 and 7.4% for FY15 vs. 7.2% and 7.4% for its peers. On this basis, together with its 1.05x P/BV compared to the sector average of 1.09x and limited impact on earnings from this acquisition, we maintain our Hold rating, with a slightly higher target price of S$0.78 as we factor in the marginally higher contributions from this acquisition to FY15 earnings.


19 August 2014
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The sun is rising

We initiate coverage on CRT with an Add rating. CRT offers investors a pure play into the reflating Japan retail real estate sector through a capital-efficient platform that can provide earnings and NAV growth. Potential yield-accretive acquisitions could catalyse its share price while prospects of a cap rate compression should drive NAV uplift.

Our 4.6% revenue CAGR projection over FY14 (annualised) to FY16 is premised on positive rental reversions from Mallage Shobu renewals in FY15 as well as additional contributions from two new assets. Our DDM-based target price of S$1.16 implies a fair value FY15-16 DPU yield of 7.1-7.2%, attractive when viewed against retail J-REITs and other retail REITs in the region.

A pure play Japan retail real estate vehicle

Croesus Retail Trust’s (CRT) portfolio comprises six assets located in the Greater Tokyo and Osaka areas with high access to transportation. In addition, not only does the trust have a stable income profile with c.85% of its leases derived from base rent, 67% of its portfolio leases are fixed-term structures, allowing its Trustee-Manager flexibility and negotiating power to optimise occupancy and rents.

Locked-in earnings growth

CRT’s key asset is Mallage Shobu, which accounts for 37% of portfolio NPI. 50% of this asset’s leases (148 of 242 tenants) are due to be re-contracted in Nov 14. Tenant remixing, by replacing the bulk of existing tenants with higher profile brands or new names to draw shopper traffic, as well as higher rental terms and positive rental reversions (over the previous post GFC low base) for the remaining leases should drive earnings growth. In addition, income from the two recent acquisitions should provide another earnings booster.

Acquisition train chugs on

The trust has a visible acquisition pipeline in Japan, and in the medium term, China. It has two Japan assets under right of first refusal (ROFR) – Mallage Saga and Forecast Kyoto Kawaramachi; together these could expand its current portfolio NLA by c.25%. This have not been factored into our current numbers and would provide further upside potential. With a gearing of 53.5% (vs. its self-imposed ceiling of a 60%) and

potential NAV uplift through rising capital values and cap rate compression, CRT’s balance sheet is robust and is well placed to drive this wing of growth.

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