Cambridge – DBSV

More surprises in 2013

• 4Q12 results in line; NAV written up by 4.4% with potential for further expansion
  
• Acquisitions and AEIs to contribute positively in the coming quarters
  
• BUY, raised to S$0.75
  

Highlights

4Q12 results in line. Cambridge REIT (CREIT) reported a 15.6% and 20.7% y-o-y rise in topline and net property income to S$24.0m and S$20.8m respectively. Growth was largely attributable to the additional income from the acquisition of five properties, rental escalations and higher reversions from its multi-tenanted properties, which more than offsets the impact of divestments. Portfolio occupancy remained high at 99.2% (vs 98.6% in 4Q11). Distributable income rose 12.4% y-o-y to S$14.9m (inclusive of S$3.3m of capital distribution), translating to a DPU of 1.229 Scts (+9.9% y-o-y).

NAV raised to 4.4% to S$0.64; further expansion possible. Portfolio valuations recorded a net gain of by 4.4%, NAV increased slightly 4.4% to S$0.64. We believe that further NAV expansion is possible with its recent acquisitions (54 Serangoon North Avenue 4 and 3 Tuas South Ave 4), which are purchased at attractive valuations. Gearing levels remained stable at 38.6% (36.0% after bridging loan repayment in the coming quarter).

Our View

Acquisitions and AEIs to contribute positively in the coming quarters. CREIT’s acquisitions of nine industrial properties worth a collective S$280.4m (of which five were completed in 2012) is likely to more than offset the loss of income from SLA’s compulsory acquisition of 30 Tuas Road and 1 Tuas Ave 3. In addition, the completion of various asset enhancement initiatives and development projects over the course of 2013 will mean incremental growth in revenues and distribution in the medium term. In addition, we see further divestment opportunities in the coming year as the management aims to keep its portfolio contemporary and relevant. Rental reversions in 2013-2014 likely to remain stable. A significant 44.6% of its leases are up for renewal (15% in FY13; 29.6%) where close to 2/3 are from its single-tenanted properties. While we note a potential risk that some of these master-leases might not roll over, this is mitigated by (i) expiring rents that are lower than market levels which means that these properties should see a net uplift in rental income eventually if fully let-out on a multi-tenanted basis (ii) seethrough occupancy for those properties are fairly high. Moreover, the manager is in active negotiations with the vendors to renew the leases ahead of their expiry.

Recommendation

BUY call maintained, TP S$0.75. Our target price is nudged up to S$0.75 after taking into account the latest announced acquisitions. CREIT continues to offer an attractive FY13-14F yield of 7.2-7.6%.