Cambridge – Phillip
Cambridge Industrial Trust (“CIT”) is the first independent industrial real estate investment trust (REIT) in Singapore, established with the objective of investing directly or indirectly in income-producing real estate related assets, which are used mainly for industrial (including warehousing) purposes. CIT’s initial portfolio comprised 27 properties, which are all located in Singapore. CIT’s key financial objectives are to deliver stable and regular distributions to unitholders, in addition to long-term growth in distribution per unit, by acquiring high yielding properties both locally and overseas.
Diverse Industrial Portfolio. CIT’s initial portfolio comprised 27 properties with approximately 426,725 sq m of lettable area. Majority of the properties are located close to current and future transport infrastructure and designed with building specification that can cater to a wide range of tenant mix. As at Dec 06, the total appraised value of the whole portfolio amounted to S$531m, leading to an annualised gross revenue for FY06A of S$43.2m. All the leases of the properties are structured under a built-in rental escalation model, providing a stable income rise for CIT. The weighted average term of the leases by acquisition value for the properties is approximately 7.9 years.
Positive Industrial Outlook. According to Urban Redevelopment Authority (URA), prices of multiple-user factory space increased by 6.8% and rentals increased by 4.1% for 2006. In addition, occupancy rates improved to 90%. We expect to continue to see more rental and capital growth in the industrial sector. Currently, Singapore has rises to the 20th position in industrial space cost- six places higher than last year.This is due to the strong manufacturing sector as well as the spillover effect from the surging office market. The timing of CIT’s acquisitions is well planned with the upturn of the industrial market. The recent acquistions done after IPO are focused on light industrial buildings. We expect the current high rental rate in the commerical sector to divert some attention to light industrial sector. Moreover, we view the rental escalation model structured into the long leases of CIT positively, due to the expected stability in rental rate .
First independent industrial REIT. Both CIT and its manager are not controlled by or dependent on any property developer. CIT will be viewed more positively when it approaches property owners who are also property developers, as they would not be perceived as being in competition with the property owner’s property related development businesses. Moreover, some of the property owners themselves will become unitholders as well as tenants of CIT. This aligned interest creates advantages and flexibility for CIT to access a large pool of potential properties located locally or overseas.
Stable and high distribution. At the current share price of S$0.81, our forecasted annual yield is 6.8% and 7.5% for FY07 and FY08 respectively. This is much higher than the Singapore REITs average yield. FY07F yield represents a healthy spread of 3.73% as compared to a risk free rate of 3.07% (Singapore 10-year bond as of 12 March 2007), and is above the market average spread of 1.10%. Compared to the other listed REITs in Singapore as well as other major REITs markets, CIT REIT offers an attractive risk adjusted investment with high distribution.
Valuation. Using Dividend Discount Model (DDM), our derived fair value for CIT is S$0.95. This translates to a 5.7% yield and a price to net asset value of 1.43x for FY07F. In our relative comparison, our fair value is above the average S-REITs/industrial yield and below the average price to net asset value. At the current price of S$0.81, we recommend a Buy for CIT with a 18% return.