Compulsory acquisition of land

The news: CIT has received formal notice from the Singapore Land Authority (SLA) on 11 Jan 2011 with regards to the compulsory acquisition of land in Tuas area (western part of Singapore) for the construction of the Tuas West Mass Rapid Transit extension and road works. All or part of the land where these properties are situated will be possessed by the Government by January 2013.

Our thoughts: Based on the company’s initial assessment, three of CIT’s 43 properties will be affected to varying degrees by this land acquisition: (i) 1 Tuas Ave 3 – likely to be wholly acquired, but management feels minimal impact as CIT has two years to work with tenant to look for an alternative site or possibly develop a facility for CWT, so loss of NPI may not materialise at all. (ii) 30 Tuas Road – only entrance expected to be impacted, likely truncated (iii) 120 Pioneer Road – least impact, grass patch in front of building. As management will be meeting up with the authorities in the next two weeks, management should have more details by release of its 4Q10 results on 11 Feb. Maintain BUY, with TP of S$0.61.

Attractive 9% yield

• S$50.4m cash call to fund property purchases

• Improved financial metrics, slight accretion to DPU

• 300 bps spread above Sreit sector average yield of 6.0% is attractive, Upgrade to BUY, TP revised to S$0.58

S$50.4m cash call to fund growth opportunities. Cambridge REIT (“CIT”) announced an equity fund raising (“EFR”) of S$50.4m via (i) private placement of 56.5m units (fully subscribed) and a preferential offering of up to 38.5m units, at S$0.531 per unit (fixed at 4.9% VWAP to price on 19 Oct).

Target yields of properties to be >8.0%. Proceeds will be used to fund the purchase of 4 properties of which 1 is a development project – CIT’s first undertaking. Post EFR, CIT will have stronger financial metrics (gearing of 36.4% after scheduled loan repayment in Nov’10), and reduced concentration of lease expiry in FY13-14 to 56.9%.

Enhancement plans unveiled, to boost DPU. CIT also unveiled AEI plans for 2 of its properties at a cost of S$13.1m, where incremental NPI yield is expected to be in excess of 15%. With the share placement and AEI works, we raised our forward FY11 DPU estimates to 2%.

3Q10 DPU of 1.18 Scts in line. Lower 3Q10 revenue and net property income (“NPI”) of S$18.2m (-2.6% yoy) and S$15.9m (-2.6% yoy) respectively were due to ongoing divestment program. Performance in 4Q10 should be lifted by contribution from its new acquisitions completed in recent weeks.

TP revised to S$0.58, Upgrade to BUY. We see relative value in Cambridge REIT given its high FY11-12 yield of 8.9-9.2%, which is a 300 bps above the average Sreit peers. Income visibility and stability is strong, given that most of its properties are sale-and-leaseback properties. Upgrade to BUY and raised TP to S$0.58.

Cambridge Industrial Trust Management Limited, the manager of Cambridge Industrial Trust (CIT), said on Thursday that it intends to undertake an equity fund raising of about S$50.4 million to help fund the acquisitions of four properties.

It is planning a private placement of 56.50 million new units in CIT at an issue price of S$0.531 each to raise gross proceeds of about S$30.0 million.

It will also offer up to 38.48 million new preferential units in CIT on the basis of one preferential unit for every 25 existing units in CIT held on October 29, 2010. The preferential units will be priced at S$0.531 each to raise gross proceeds of up to about S$20.4 million.

The properties to be acquired comprise 25 Tai Seng Avenue, a 7-storey light industrial cum office building which was completed in 2009; two light industrial buildings at 511 and 513 Yishun Industrial Park A; a 4-storey factory and a built-to-suit project for lease, expected to be completed and operational in 2011.

The total acquisition cost is estimated around S$74.3 million.

CIT's manager intends to finance about S$48.6 million of the total cost with the net proceeds from the equity fund raising.

The balance S$25.7 million of the cost will be financed by a partial draw-)down of S$21 million under an existing acquisition term loan facility and existing cash of S$4.7 million.

The Royal Bank of Scotland N.V., Singapore Branch has been appointed as the sole global co-ordinator of the equity fund raising, and the sole bookrunner and underwriter for the private placement.

CIT Q3 distributable income dips 3.6%

CAMBRIDGE Industrial Trust (CIT) yesterday reported steady financial results for its third quarter.

Distributable income was down 3.6 per cent from a year earlier to $10.81 million. Distribution per unit was 1.187 cents.

The dip in distributable income was accompanied by a 2.6 per cent decline in gross revenue to $18.21 million, mainly due to lower rental income resulting from the sale of some properties and strata units between October last year and Sept 30, 2010.

Occupancy rate remains high at 99.97 per cent, ‘higher than the national average of 92.3 per cent’, CIT said.

The book value of its investment properties was $838.5 million at Sept 30, down from $874.2 million at Dec 31, 2009.

During Q3, CIT acquired two industrial properties. On Sept 16, it conducted a private placement exercise that raised $40 million, $24.7 million of which was used to partly fund the acquisition of the two properties for a total $37.7 million.

CEO of CIT Chris Calvert said that the ‘strong interest from institutional and certain private investors in the recent private placement demonstrates the attractiveness of CIT as a Reit investment’.

Further boosting its financial flexibility, CIT has secured a new three-year acquisition term loan and revolving credit facility totalling $70 million.

The company also moved to strengthen its balance sheet during Q3. It has reportedly reduced its gearing ratio to 39 per cent from 42 per cent, after repaying part of a $32 million term loan. It has earmarked an additional $35 million from divestments to a loan repayment on Nov 17 that will further bring its gearing to 36.8 per cent.

Following the September private placement, CIT unitholders had an advance distribution of 0.68 of a cent per unit. They will receive the balance of 0.507-cent per unit on Nov 30.

The CIT counter closed a cent higher at 56.5 cents yesterday.

Tapping cash pool for new purchases

• Acquisition of Scorpio East Building for S$21.1m at initial 8% yield

• Positive acquisition with slight 2% accretion to DPU in FY11F, and terming out WALE.

• Rolling forward our numbers to FY11, TP is raised to S$0.54. Maintain HOLD.

Acquiring up to S$60m worth of properties to date. Cambridge REIT (“CIT”) announced the acquisition of Scorpio East Building, a recently completed light industrial building located in Paya Labar iPark, for S$21.1m (2% discount to valuation of S$21.5m). With this latest purchase, CIT will have acquired close to S$60m worth of properties to date. The Initial yield of the property is estimated to be c8.0% (based on Scorpio East’s annual rental of S$1.7-S$1.9m), which is in line with CIT current implied yield of 7.9%. The property will be leased back to the vendor for 5 years. The manager intends to fund the purchase through a combination of debt/equity.

Slight accretion to DPU and terming out the weighted average lease expiry (“WALE”) The manager has remained proactive in re-positioning its portfolio, replacing recent asset divestments with new asset purchases. Including this acquisition in our numbers, our FY11 DPU is raised by c2%. In addition, CIT will see its tenant expiry profile terming out further, reducing the concentration of expiry in FY13-14.

HOLD call maintained, TP adjusted to S$0.54. With our revised DPU estimates and rolling forward our numbers into FY11, our target price is raised to S$0.54. Maintain HOLD in view of limited upside. CIT currently offers FY10-11F yields of 9.1%.