Executing two-step funding

• FY10-11F DPU cut to reflect asset sale, sale of AAREIT stake; FY12F DPU of S$0.052

Following the 4Q09 results, we have revised our estimates for CREIT to reflect the sale of 16 Tuas Avenue 18A and six strata units at Enterprise Hub during the quarter. In addition, we have factored in a loss of S$2.4mn booked in 4Q09 from the sale of CREIT’s entire stake in AAREIT (formerly MIREIT), which we had previously included in our distribution forecast. All in, we have cut our FY10-11F DPU forecasts by 10.5-10.8% and we introduce our FY12F DPU forecast of S$0.052 (+1.6% y-y).

• Further asset divestment could pare DPU by S$0.003

As of end-4Q09, assets worth S$78.6mn have been contracted for sale over the next 12 months and booked as “investment properties held for divestment”. Assuming an average exit yield of 8% for these assets and that the proceeds will repay borrowings that cost 4.2% in cash interest, our numbers suggest another S$0.003 could be shed from our FY10-12F DPU forecasts. Given that this is in essence a two-step funding process for potential accretive opportunities (divestment proceeds to pay down existing term loan facility, and then use the debt capacity to gear up for asset enhancement of existing portfolio or external acquisition), the ultimate DPU impact therefore will depend on management’s execution of this strategy.

• NEUTRAL, price target raised to S$0.48

We have cut our cap rate assumption by 50bps and, adjusting for other changes following the results, we have raised our core NAV and price target to S$0.48 (from S$0.44). Our new price target offers a potential total return of 17.7%, including a projected FY10F dividend yield of 11.3%.

Full Year 2009 Results

• Full year revenue of $74.4 million, net property income of $65.1 million, distributable income of $44.2 million.
• 4Q09 DPU of 1.38 cents, bringing full year DPU to 5.36 cents.
• Total asset value of $874.2 million.
• Maintain hold recommendation, fair value raised from $0.41 to $0.48

Results within expectations
CIT recorded full year revenue of $74.4 million (+3.0% y-y), net property income of $65.1 million (+3.7% y-y) and distributable income of $44.2 million (-7.7% y-y). Full year DPU was 5.36 cents (-10.9% y-y). CIT full year results came in within expectations. Revenue was +2.0% higher than our forecasts, net property income was +1.4% higher, distributable income was +11.6% higher and DPU was +10.9% higher. The higher DPU against our forecast was due to the amortization of transaction cost.

CIT divested some properties in 4Q09 for total sale proceeds of $6.6 million and recorded a gain of $0.3 million. Total property asset value as at 31 Dec 2009 was $874.2 million. CIT has reclassified $78.6 million worth of properties as current assets held for divestment and management has mentioned that these properties would be divested in the course of the year.

Quarterly results review
CIT has registered stable revenue with slight growth over the quarters. This is expected as the leases are secured with an rent escalation component. Portfolio occupancy was also remarkable at almost full occupancy, above the Singapore industrial average of 91.9%. DPU has held steady in the past 3 quarters. Going forward, we may see a weakening in revenue as well as DPU, given that CIT has sold off some properties and had also earmarked properties meant for divestment.

Capital management
CIT has total of $390 million, which is due only in 2012. Gearing (debt/assets) is 42.6%. CIT was among the first REITs to secure refinance during the height of the credit crisis in 2009. For its ability to secure the refinancing, it was awarded the ‘Best Deal in Singapore 2009’ award at The Asset Magazine Triple A Asian Awards earlier this year.

Forecasts
We made some adjustments to our revenue forecast to account for the divestment of properties, however we have not factor in the sale of the earmarked properties as well as any contribution from asset enhancements and acquisitions. We forecast a revenue drop of 5.4% in FY10E and a DPU of 4.2 cents, which translate into a dividend yield of 9.0%. We roll forward our valuation to FY2010E and raise our fair value from $0.41 to $0.48 and maintain our hold recommendation.

Making the right moves

• Stable recurrent income from portfolio with 99.8% occupancies
• Divestment of non-core assets crystallizes NAV.
• Future catalysts from acquisitions and asset enhancement.
• Laggard for too long, Upgrade to BUY, TP S$0.54

Improved DPU of 1.377 Scts. With high occupancies of 99.8%, the group achieved topline and net property income of S$18.9m and S$16.7m respectively. Distributable income grew 6.6% to S$11.9m, translating to a DPU of 1.377 Scts. The group also plans to institute a dividend reinvestment scheme starting from 4Q09 distribution, of which details will be announced at a later date.

Divesting non-core assets to realize its NAV. Management is selling non-core assets to keep its portfolio up to date. In 4Q09, the trust sold off S$6.6m worth of properties (16 Tuas Ave 18A property and 6 out of 120 strata units at Enterprise Hub) at above book values. In the coming months, CIT targets to divest S$78.6m worth of properties. This is positive for CIT to realize its NAV and improve its financial flexibility going forward.

REIT with a warchest? Sale proceeds will likely be used for (i) repayment of debt, (ii) acquisition opportunities that management is currently exploring or (iii) asset enhancement activities at a couple of existing properties. All these will position CIT with better portfolio quality and financial flexibility.

Upgrade to BUY, TP S$0.54. We believe CIT offer investors to partake in the group’s portfolio reconstitution strategy of which should be value enhancing for unitholders. Valuations are compelling at 0.75x P/NAV and prospective FY10-11F yields of c11.2-11.6%, backed by long leases and rental guarantees. Upgrade to BUY, TP S$0.54 based on DCF as we lower our WACC assumptions to take into account the improved outlook.

Business As Usual

The recent MIREIT saga came to an end as all the resolutions were passed during the EGM. According to the latest regulatory fillings, Cambridge Industrial Trust (CIT) has sold down its stakes in MIREIT from 26 million units to 13.31 million units. We believe that CIT has no intention of maintaining an interest in MIREIT. A recent update with management indicates that it is business as usual and it will focus on its original plan that was outline before the saga took place.

De-leverage. CIT current gearing is 42% and has total debt of $390.1 million. Management expects year-end valuation of the portfolio assets to remain constant and therefore should not affect gearing substantially. De-leverage strategy involves divesting non-core assets as well as the implementation of Dividend Reinvestment Plan (DPR) to retain cash and pay down debt. CIT has a target gearing in the range of 30-35%. No firm implementation date has been set yet, but the DRP program is slated to commence from 1QFY10.

Asset enhancement and acquisitions. Management is in talks with tenants on possible asset enhancement initiatives, however tenants are still cautious about the recovery at this stage and nothing has been carried out yet. On the acquisition front, management has not rule out making acquisitions in the next year.

Valuation and recommendation. In our opinion, the MIREIT episode has caused slight hiccups to the initial plan of CIT, but no real derailment. The underlying portfolio is still sound with high occupancy rate and tenants are paying their rents on time. The impact on CIT besides some bad presses is the financial impact to the bottom line. According to our calculations, we estimate that CIT would have incurred a loss
of approximately $2.3 million if it completely off-loads its holdings, which has a minimal impact on NAV. We make no change to our forecasts for now and maintain a Hold recommendation.