Cambridge – CIMB

Weaker underlying conditions

CIT’s 4Q14 results were in line with our forecast, with its FY14 DPU accounting for 101% of our full-year estimates. While we see continued topline growth, we expect NPI margins to stay weak in FY15 as another two properties await conversion into multi-tenanted buildings (MTBs). Given this and the slow FY15 outlook in the leasing market of the industrial sector, we fine-tune our FY15-16 earnings forecasts downwards by 0.9-1.7%. This lowers our DDM-based (discount rate: 8.3%) target price to S$0.68. Maintain Hold.

4Q14 results in line

Cambridge Industrial Trust’s (CIT) 4Q14 results were in line, with its DPU accounting for 25% of our FY14 estimate. For the full year, CIT renewed 1.9m sq ft of leases, representing 23.8% of the REIT’s portfolio, with a positive rental reversion of 4.6%. During the quarter, it completed the acquisition of 16 International Business Park and the AEI at 21B Senoko Loop (Phase II). Occupancy as at 31 Dec remained stable at 96.0% (unchanged from 3Q14).

Lower NPI margins

Though CIT’s topline increased by 3% yoy, DPU rose only 0.6% yoy. This was attributable to the continual softening in NPI margins (74.5% in 4Q14 vs. 81.4% in 4Q13) as management converts more buildings into MTBs while rental rate has yet to catch up. In 4Q14, DPU was in part supported by management taking on 100% of its management fees in units (rather than cash) to bridge the gap of lower income as a result of these conversions. If the same amount of distribution via capital in 4Q13 was paid out in 4Q14 and management fees were fully paid in cash, DPU in 4Q14 would have dipped by c.4.4% yoy, based on our estimation. With another two properties to be converted to MTB, coupled with a soft outlook for the industrial leasing sector, we expect CIT’s NPI margins to remain soft in 2015. Given its leverage ratio of 34.8%, the REIT is expected to grow via inorganic means in FY15; though that remains a challenging avenue in view of the current high asset valuations and tight acquisition market.

Maintain Hold

We see little reason to be excited over CIT given its still-weak NPI margin and limited room to expand inorganically. Currently, CIT offers a FY15 dividend yield of 7.4% – a level similar to its peers. Maintain Hold.