Cambridge – CIMB

Stable for now

• Results in line. 1Q09 results are in line with consensus and our expectations. DPU of 1.29cts forms 27% of our forecast for FY09. Gross revenue of S$18.4m was flat qoq, but net property income of S$16.1m was up 6% qoq as CREIT benefited from land-rent and property-tax rebates. Portfolio occupancy was 99.2% as at 31 Mar 09, down marginally from 99.5% in Dec 08.

• Covenants on debt facility may strain cash flow. Management clarified that its weighted average effective interest rate is 5.9% p.a., and not 7.2% as reported in an SGX release on 18 Feb 09. Management earlier assumed that the swap cost of S$18.35m would be expensed over the tenure of the new debt facility. It will now recognise the change in fair value and expense off S$18.35m. Although the need to repay this S$18.35m over the tenure of the CIT facility will not affect distribution, cash flow may be strained. Management is exploring options to increase cash proceeds which could include the divestment of non-core assets, scrip dividends and a rights issue, among others.

• Adequate buffer before cash lock-up is triggered. Management revealed more debt covenants, including a loan to value (LTV) ratio of 55% and a debt service cover ratio of 2.2x, and lenders’ right to lock up cash proceeds if the LTV reaches 50% or if the debt service cover ratio reaches 2.5x. The revelation of the second covenant is worrying, implying that lenders could technically halt distribution to unitholders. Nonetheless, we take comfort in the relative stability in the medium term as asset values will need to decline by about 25% before the 50% LTV is breached, in our estimation.

• Maintain Outperform with lower target price of S$0.47, still based on DDM valuation (discount 9.6%). We lower our occupancy assumption to 95% from 98% to reflect possibly increased cases of tenant default. Our 2009-11 DPU forecasts fall by 9-12%. Nonetheless, we expect CREIT’s performance to be stable, with only 6.1% of rental income expiring between now and 2012, 16 months of security deposits on average, and 5.4 years of weighted average remaining lease term (by income).