Cambridge – DBSV

Divesting non-core assets is positive

At a Glance

• DPU of 1.24 Scts in line

• Restructure portfolio with aim of lowering leverage is positive in the longer term

• Stable 9.9% yields, maintain BUY, TP S$0.54.

Comment on Results

No surprises in 2Q10 results. Topline was slightly lower at S$18.3m (-0.9% yoy) due to divestment of properties; offset somewhat by higher rentals from its periodic rental escalation clauses. Portfolio occupancy remained high at 99.9%, with incomes relatively secured. Net property income improved marginally to S$16.1m (+0.5%) due to lower operating expenses. Despite relatively flat distributable income of S$10.8m, DPU was down 7.8% yoy to 1.24 Scts due to larger unit base.

Portfolio revaluation remained stable. CREIT’s portfolio was revalued at S$831.1m at half time, up S$6.1m (+1%) after netting off its divested properties, translating to 59.9 Scts NAV.

Recommendation

Positive capital recycling strategy. We are positive on management plans to continuously sell its non-core assets, keeping the portfolio relevant. To date, CREIT recorded S$49.7m in asset sales and has contracted to sell another S$40.5m worth in the coming quarters. A majority of the proceeds (up to S$60m) will be used for debt repayments to strengthen balance sheet and lower gearing to <40% by end FY10. The rest will be channeled towards planned asset enhancement initiatives (AEI).

Time to look for growth opportunities? Planned AEI on a couple of its assets could further enhance portfolio yields in the medium term, which are not factored in our numbers yet. Acquisitions however, could be challenging given relatively high-implied yields of c9.0%. With gearing of 42%, any acquisitions would have to be partially funded by new equity, which is expensive.

Buy for stable yields of 9.9%. CREIT remains attractive for its stable FY10-11F DPU yields of 9.9%, 300 bps above the Sreit peers and 740 bps above the Singapore government bond yields.