Category: ESR
Industrial REITs – OCBC
On stronger footing
Stronger balance sheets. The industrial REIT sub-sector is in much a stronger position, in our view, compared to a year ago. REITs including A-REIT, Mapletree Logistics Trust, AIMS AMP Capital Industrial REIT [AAREIT, NOT RATED] and Cambridge Industrial Trust [NR] have all raised fresh equity within the past year or so. The sub-sector is on average geared at 33.5% debt-to-assets versus the broader S-REIT average of 30.6%. While the level of debt has decreased generally, there are still pockets of industrial REITs with higher leverage. Leverage levels range from 25% (Cache Logistics Trust, NR) to 42.6% (Cambridge).
Expecting some stability. The managers for the most part presented a cautiously optimistic outlook going forward – both in terms of a bottoming out of asset values and of rents. This is in line with the expected GDP growth of 7-9% in Singapore this year. Colliers expects the recovery in the exports and manufacturing sector to “support an expansion in demand from manufacturers”. This, along with the return of institutional funds, could drive “rents, land and capital values of singleuser factories and warehouses [up] to 10 percent in the next 12 months”. The demand-supply picture varies by asset type, but we do expect a stable-to-positive year for rents and asset values this year, barring significant shifts in the economic environment Big growth plans. Acquisitions are back on the table with transactions worth S$1.25b done in the last seven months; we could potentially see MLT, A-REIT and Cache grow their portfolios further. Balance sheet strength and ability to access capital competitively remains the key sticking point. The subsector has also indicated a new focus on development projects, which has been A-REIT’s domain until now. Asset enhancements and divestments appear to be popular strategies as well.
Valuation. In terms of forward yield, industrial REITs trade at a premium of 100 basis points to the broader sector. Interesting, industrial REITs are actually trading at a lower 5% discount-to-book versus 13% for S-REITs on average. There is significant divergence in valuations within the sub-sector: while A-REIT is trading at a 22% premium to book value, on the other extreme, AAREIT trades at a 32% discount to book. We think this is partially because of continued investor caution towards smaller industrial REITs. Nevertheless, if second-tier industrial REITs can present two to three quarters of sustained earnings performance and deliver on their strategic plans, we could see the valuation gap narrow. We have a NEUTRAL rating on the broader S-REIT sector.
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.
Cambridge – Phillip
1QFY10 Results
• 1Q10 revenue of $18.6 million, net property income of $16.3 million, distributable income of $11.1 million.
• 1Q10 DPU of 1.27 cents.
• Disposal of assets worth $21.5 million, 10% take-up for 4Q09 DRP
• Maintain hold recommendation, fair value $0.51
Consistent Results
Cambridge registered 1Q10 revenue of $18.6 million (+1.3% y-y, -1.5% q-q), net property income of $16.3 million (+1.2% y-y, -2.7 q-q) and distributable income of $11.1 million (7.8% y-y, -7.2% q-q). DPU for the quarter was 1.27 cents (-1.3% y-y, -7.5% q-q). Stable growth y-y resulted from the annual rent increases. However as the Trust had started divesting assets from 4Q09, q-q results reflected the decrease in income. DPU was higher in 4Q09 compared to 1Q10 due to the dividend income from AIMS AMP Industrial REIT. Contribution in 1Q10 was minimal at $0.1 million. Cambridge has since fully divested its interest. Portfolio occupancy continues to climb and improved to 99.9%.
We continue to see progress on the assets divestment program. Cambridge disposed another 32 strata units of the 48 Toh Guan Road East property for $21.5 million, approximately 7.5% above book value. To-date, it has sold $28.1 million of assets. The Trust has classified on its balance sheet another $70 million of assets for disposal. The Dividend Reinvestment Program (DRP) was carried out for 4Q09 and received an approximate 10% take-up rate, translating to $1.1 million of funds. The proceeds from the divestments and DRP program are earmarked for asset enhancements as well as reducing debt.
Capital management
To recap, Cambridge has total debt of $390.1 million, which is due in 2012. Gearing is at 42.6%. Management has a long term gearing target of 30-35% and this will be achieved through a combination of divesting non-core assets as well as accumulating funds from the DRP.
Forecasts
The sales of the assets above book value bolster our view that industrial capital values are holding up well and should not see further weakening. We also like to see the amount of debt reduced as we feel it is the main overhang on the Trust, with a gearing ratio of 42.6%, it is one of the highest geared REIT. We make some changes to our assumptions, raising our occupancy projection to 99% while incorporating loss of revenue from the divestment assets and also increasing the amortised loan transaction amount to the distributable income. We further assumed that the trust reduced its gearing to 39% at year-end. Our DPU for FY10E is 4.92 cents, which translate to a yield of 9.7%. We raised our fair to $0.51 and maintain our hold recommendation.
Cambridge – DBSV
One step at a time
• Portfolio restructuring on track – additional S$70m of assets earmarked for sale
• Gearing could head down towards 38% post restructuring
• Maintain BUY, TP S$0.54, offers total return of 16%
1Q10 results in line. Cambridge REIT (“CIT”) declared a 1Q10 DPU of 1.274 Scts, amounting to 25% of our full year forecast. Revenues grew 1.2% yoy to S$18.6m as a result of higher rentals from rental escalation from selected assets offset by the income vacuum from the divestment of 2 properties. Net property income likewise rose 1.2% to S$16.3m as a result of stable operating margins.
Divestment strategy on track – earmarking additional S$70m of assets. In 1Q10, CIT divested additional 32 strata units in Enterprise Hub, bringing in S$21.5m in proceeds. The manager has earmarked an additional S$70m worth of assets to be sold during the course of this year. Cash received from the divestment are earmarked for debt repayment or can reinvested into new assets. Incorporating the first scenario and assuming debt repayment at the end of FY10, we estimate that (i) impact from the loss on contributions on earnings in FY11 is minimal at -3% and (ii) gearing levels is projected to improve towards 38% in FY11.
Evaluating asset enhancement opportunities. Management also shared that they are exploring several opportunities to enhance a couple of its properties, where plans could include (i) minor works to raise gross NLA or (ii) intensifying current plot ratios at a couple of its properties. While no firm details have been finalized, we believe that the execution of these opportunities could present re-rating catalysts for the stock.
Attractive 10% yields. We like the asset and financial management initiatives by CIT’s, which will result in a stronger balance sheet going forward. The stock currently trades at 0.85x P/bv, below its industrial peers who are trading in the 1.0x – 1.2x P/bv range and offers a stable FY10-11F DPU yields of c10%.
Cambridge – SGX
Singapore, 21 April 2010 – Cambridge Industrial Trust Management Limited (“CITM”), the Manager (“Manager”) of CIT, announced that CIT achieved gross revenue of S$18.6 million and a net property income (“NPI”) of S$16.3 million for its 1Q2010 financial results. “CIT has achieved a set of stable first quarter financial results for its Unitholders.
Unitholders will receive a DPU of 1.274 cents, which will be payable on Monday, 14 June 2010,” said Mr. Chris Calvert, Chief Executive Officer of CITM. “While the outlook for 2010 has improved, we remain cautiously optimistic of a full economic recovery. This further reinforces the need for management to maintain its disciplined strategy of prudent capital and risk management, pro-active asset management and the divestment of noncoreassets that do not meet the Trust’s investment criteria.”
1Q2010 NPI increased by 1.2% to S$16.3 million in comparison to 1Q2009. The increase is attributed to rental escalations and the improved occupancy in CIT’s two multi-tenanted properties. 1Q2010 NPI was marginally lower by 2.4% in comparison to 4Q2009, predominantly due to a reduction in rental revenue arising from asset disposals (i.e. 32 Urbanstrata units at 48 Toh Guan Road East, Enterprise Hub were divested during 1Q2010).
Total gross sale proceeds of S$21.5 million exceeded book value by S$1.6 million. “Divestment proceeds will be used to lower CIT’s gearing level where they cannot be reinvested into the Trust’s existing assets to create additional capital value. The Manager expects gearing level to be around the 38% mark by the end of 2010,” highlighted Mr. Calvert.
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