Cambridge – RBS

Restructuring debt

CREIT’s recent acquisitions have led to an upgrade in portfolio quality. Management intends to restructure debt to bring down gearing and interest costs. We raise our TP to S$0.58 and reiterate Buy.

Upgrading quality of property portfolio

CREIT’s recent acquisition of two properties has upgraded its property portfolio. CREIT’s asset lease expiry profile and tenant mix has improved after the S$37.7m acquisitions. To fund them, CREIT raised S$40m from a placement of 86.7m of new units at S$0.478/unit. Of the proceeds, S$24.7m will be used to finance the purchase, with the rest kept for future acquisitions. Following the purchase, CREIT’s gearing ratio falls to 41.5% from 42.6% as only 34% of the acquisition will be funded by debt.

Potential debt restructuring should improve earnings

Management expect CREIT to realise S$90m from the sale of non-core assets by the year end. In August, CREIT paid down its existing debt facility by S$32m bringing its gearing down to 39.5% from 42.6% as of June 2010. Management plans to pay down a further S$30m of the proceeds and use the rest for asset upgrades. The company also intends to restructure its current debt of S$360m which was refinanced at the peak of financial crisis in February 2009 at 5.9% vs current spot rate of 3%, on our estimates. This raises our distributable income by 6.9% for FY10-11F.

Slight dilution expected on acquisitions

The new properties generate a net property income yield of 8.3%, akin to CREIT’s yield prior to the acquisition. Given the expected dilution from the placement, we estimate distributable income per unit (DPU) dilution of 3% in both FY11 and FY12. The new properties will have built-in rental escalation of 2% pa on average during the lease period of seven years vs 2.5% for CREIT pre-acquisitions. Gross floor area at one of the acquisition targets (Chin Bee) may be enhanced by 40%. This should reduce dilution to just 2% in both FY11F and FY12F.

Reiterate Buy with higher target price

Our DCF-based target price is raised to S$0.58/unit (from S$0.53) on the back of our earnings upgrade. We have reduced our cost of equity to 12% (from 13.2%) as bond yields continue to trend down. The stock yield is attractive, in our view at 9.2% in FY10 and 10% in FY11 vs peer average of 7.9% and 8.4%, respectively. It trades at 13% discount to book value vs 0.8% discount for peers, on our analysis.