Month: September 2008
Cambridge – SGX
CIT COMMENCES EVICTION ACTION AGAINST OLIVINE MAGNETICS
Cambridge Industrial Trust Management (“CITM”), the manager of Cambridge Industrial Trust (“CIT”), on legal advice today commenced proceedings to evict Olivine Magnetics Pte Ltd (“Olivine”) from premises owned by CIT at 130 Joo Seng Road (“the Property”).
An on-demand bank guarantee held as a rental deposit in relation to the Property has already been called. CITM does not expect the eviction proceedings to have a material impact on the earnings of CIT. CIT intends to commence re-tenanting the property when eviction proceedings are complete; in particular CIT intends to commence negotiations with Olivine’s existing subtenants in the Property as soon as practicable.
On completion of the eviction proceedings, CIT’s occupancy across its portfolio will be 98.3%.
Mapletree – UOBKH
Dilution From 3-for-4 Rights Issue
Completed 3-for-4 rights issue. Mapletree Logistics Trust (MLT) has completed a 3-for-4 rights issue at a price of S$0.73. It has raised S$606.7m through the issuance of 831.1m new units. Sponsor Mapletree Investments has given an irrevocable undertaking to take up its entire allotment and subscribe for all excess rights units. Mapletree Investment has increased its stake in MLT from 30.2% to 46.9% after acquiring 325m excess rights units. MLT will utilise proceeds from the rights issue to acquire 13 properties in Singapore (6), Malaysia (2), China (3), Japan (1) and South Korea (1) worth S$357.1m. Assuming the acquisition of these targetted properties is already completed, DPU for 1H08 will decrease 25.6% to 2.93 cents. NAV/share will be reduced from S$0.94 to S$0.84 and gearing from 56.3% to 36.8%.
Collaborating with Mapletree Investments on regional expansion. MLT has identified Singapore, Hong Kong and Japan as priority markets. It plans to have 70-75% of its portfolio in developed markets and the remaining 25-30% in emerging markets. Mapletree Investments has invested S$846m in 10 development projects, including logistics parks, build-to-suit and ready-built logistics facilities in China (six properties), Vietnam (three) and Malaysia (one). These assets will be offered to MLT under a right of first refusal valid till 2010. MLT plans to grow its asset base to S$5b by 2010.
Properties in China, Hong Kong, South Korea and Malaysia account for 33% of net property income. The risk-free rates in these markets are much higher compared with that of Singapore. There is also a potential share overhang after the rights issue.
Cambridge – UOBKH
Compelling BUY Due To Attractive Distribution Yield
Defensive strength from earnings visibility. Cambridge Industrial Trust’s (CIT) weighted average lease term to expiry was 6.4 years as at Jun 08. There are no expiries from 2008 to 2010. The bulk of the leases will expire in 2013 and beyond. CIT is well protected by security deposits averaging 17 months in the form of bankers’ guarantees. Leases are structured with periodic rental step-ups of 5% every two years or 7% every three years, thus providing steady organic growth of 2.5% p.a. Its top 10 tenants accounted for 62.6% of gross rent in Jun 08. Its largest tenant, CWT Limited, accounts for 14.1% of gross rent. Management expects current occupancy of 100% to be maintained in 2H08.
Seeking refinancing via Islamic finance. CIT plans to refinance S$390m variable funding notes expiring in Feb 09 with Shariah-compliant three-year syndicated Ijara (Islamic sale & leaseback). The transaction is subject to approval by unitholders and is expected to be completed by 3Q08. Management expects Islamic Finance to reduce cost of borrowings by at least 20bp compared with conventional banking facilities. CIT will be the first Shariah-compliant real estate investment trust (REIT) listed in Singapore after completing the conversion process.
CIT provides distribution yield of 10.3% for 2009, an attractive spread of 7.2% over 10-year Singapore government bond yield of 3.1%. Its share price has also corrected 39.3% from the peak of S$0.98 in mid-07 and is trading at 12.5% below the price of S$0.68 during the IPO in Jul 06. We have conservatively factored in cost of borrowings of 4.5% to reflect the risk of refinancing short-term borrowings. Initiate coverage with a BUY recommendation and target price of S$0.89 based on the two-stage dividend discount model (required rate of return: 8.5%, growth: 2.8%).
AREIT – UOBKH
Prime beneficiary of migration to suburban office space
Benefitting from positive rental reversion. The renewal rate for business & science parks was S$4.09psf pm in 1QFY09, an increase of 45% yoy. The renewal rate for hitech industrial space in the quarter was S$3.11psf pm, an increase of 35% yoy. The business & science park and hi-tech industrial segments accounted for 30% and 22% of its portfolio by value respectively. A-REIT will benefit from positive rental reversion as business & science parks and hi-tech industrial segments account for 29.9% and 40.1% of leases expiring in FY09 respectively. Existing contract rates are only S$2.30psf pm for business & science parks and S$1.90psf pm for hi-tech industrial space, much lower than current market rates.
Maximising distribution yield through development projects. Ascendas REIT (AREIT) is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park, which is scheduled for completion in phases from 4QFY09 to 3QFY11. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities for its international technology office supporting its consumer businesses, regional processing centres for securities & funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a seven-storey build-to-suit building completed in Jan 08. Development projects provide yields of 8-9% compared with 6-7% for acquisitions.
A-REIT is the largest industrial REIT in Singapore and is rated A3 with a stable outlook by Moody’s Investors Service. Sponsor Ascendas is a subsidiary of Jurong Town Corporation, the government agency responsible for developing industrial infrastructure to support economic growth. Our target price of S$2.95 is based on a two-stage dividend discount model (required rate of return: 8.5%, growth: 3.2%).
CMT – OCBC
A leader in asset enhancement
Key strength lies in asset management and enhancement. The tight credit market has raised concerns that REITs could face a tougher time making yield-accretive acquisitions and thus resulting in slower DPU growth ahead. For CMT, investors should focus on its growth via asset management and enhancement instead, which can potentially generate between 8% to 25% return on investment. CMT had proven its astuteness in the area of asset enhancement initiatives (AEIs) and with its ongoing AEIs, CMT should still be able to grow its DPU even if there are no new future acquisitions and a freeze in rental rates.
Big is beautiful. Bigger REITs have comparative advantage over smaller REITs in the area of AEIs, as the latter may face a lower limit on borrowings, which is partly determined by asset value, and can not afford similar largescale AEIs. Bigger REITs such as CMT can leverage on their size to undertake larger scale AEIs that can generate higher incremental value without significantly affecting short term distribution.
Debt expiry profile. CMT will have S$936.2m of borrowings that need to be refinanced in 2008 and 2009, with the majority due in August 2009. Part of these can be refinanced using the untapped portion of its multicurrency medium term note programme. For the remainder, we do not think that there will be any serious issue in terms of refinancing with the backing of a strong sponsor – CapitaLand. CMT has also locked in the swap rate for five years for its S$320m term loan that is due for refinancing in August 2009, which protects it from any future increase in interest rate.
Resume coverage with BUY. Based on our RNAV valuation and factoring in The Atrium, we peg the fair value estimate for CMT at S$3.21, at par to its RNAV, which provides a potential upside of 16.8% from its last price of S$2.75 and offers FY08 and FY09 distribution yields of 5.3% and 6.3%, respectively. Share price has corrected 16.9% over the last 3 months, and CMT had underperformed the rest of the retail REITs and this brought its distribution yield closer to the rest of the retail REITs. We believe CMT deserves to trade at a premium to its peers, given its size advantage and visible growth from AEIs. We resume coverage on CMT with a BUY rating.