3QFY09 Results

Cambridge Industrial Trust (CIT) reported results for 3QFY09. CIT recorded gross revenue of $18.7 million (+2.1% yoy, +1.2 qoq), net property income of $16.4 million (+0.9% yoy, +2.2% qoq) and distributable income of $11.2 million (-5.5% yoy, +4.6% qoq). DPU for 3QFY09 is 1.344 cents (-9.7% yoy, flat qoq).

Gross revenue showed slight improvement over the quarters on the back of rental escalation of leases and improving occupancy. Correspondingly, distributable income also increased over the quarters, however DPU for 3QFY09 was impacted by the dilution of the placement exercise, which saw 71 million new units being issued.

Current gearing of CIT is 42.6% and CIT total debt of $390.1 million matures in Feb 2012. Total portfolio size is $880.4 million and management expects asset valuation to hold.

Divestment plan to continue. The management of CIT indicates that asset rebalancing is a long-term action plan for CIT. Currently it has identified properties that are non-core to the portfolio and has plan to divest those properties. Aside from divesting assets, management is also considering entering into joint development projects with reputable developers.

Dividend reinvestment plan. CIT has proposed a dividend reinvestment plan (DRP) whereby investors can opt to have their quarterly dividend payout in the form of units instead of cash.

The proceeds from the asset divestment and the DRP will be used to reduce gearing. The management hopes to bring long term gearing down to 30-35%.

Valuation and recommendation. We feel the underlying portfolio has perform better than expectations. Occupancy rate has held up well and arrears average around 1.4% of gross rent. CIT maintains an average of 15.7 months of security deposit. We feel the main overhangs on the REIT are the high gearing and the relatively high interest cost, which are both a drag on DPU. Although both the divestment and DRP could bring down gearing, it has to be balance with accretive acquisitions in order to be value-add to investors. We revise up our occupancy rate and also factor in the dilution of the recent placement. Our fair value is lowered from $0.45 to $0.41. Our FY09F DPU is lowered from 4.93 cents to 4.83 cents. Maintain Hold recommendation.

Addressing its gearing

At a Glance

• Results slightly above
• Asset restructuring/ dividend re-investment scheme proposed
• Maintain HOLD, TP S$0.49.

Comment on Results

Results slightly above. Cambridge REIT (CIT) results were slightly above estimates. Gross revenues and net property income (NPI) grew by 2.2% to S$18.7m and 1% to S$16.4m respectively on the back of steady occupancies (99.7% in 3Q09). However, distributable income declined 5.5% to S$11.2m largely due to higher interest costs, translating to a DPU of 1.34 Scts.

Moving occupancy assumptions upwards. The out- performance was mainly due to higher than projected occupancy levels, as we expected a slight dip. With improving economic outlook and that less than 3% of leases are up for renewal over the next 3 years, we have moved our occupancy assumptions upwards to be in line with current operational performance, leading to a 8% increase in our forward DPU estimates.

Moving towards gearing of 30-35%. The manager is reviewing ways of reducing the trust’s gearing from 42% to 30-35% level. Various measures are proposed which include (i) divesting certain non-core assets (ranging from S$25m-50m) and proceeds will be channeled towards repaying debt, (ii) a dividend re-investment scheme to conserve cash (possible instituting in 4Q09). The above are currently not included in our current forecasts.

Recommendation

Prospective yields of 11.2%. While we acknowledge that FY09-11F yields of c11% remains attractive, uncertainties from outcome from its portfolio restructuring could likely cap re-rating opportunities in the near term. Maintain HOLD, TP adjusted to S$0.49.

Quarterly improvement in gross revenue and net-property income

What has changed?

• Cambridge announced its 3Q09 results on 27 October. Net-property income (NPI) was 1.3% above our forecast, while distribution per unit (DPU) of 1.34¢ was 9% above our forecast.

Impact

• Gross revenue increased by 1.3% QoQ and was 1.6% above our forecast. Overall occupancy improved to 99.7% (from 99.5% in the previous quarter). According to the manager, all leases expiring in 3Q09 were renewed. Rental renewal risk remains one of the lowest in the sector, with only 6.6% of leases (by gross revenue) up for renewal in 2009-12.

• The major positive variances came from lower-than-expected other trust expenses and higher-than-expected (pre-distribution) adjustments.

• We have revised up our DPU forecasts by 1.7% for FY09, 3.1% for FY10, and 2.6% for FY11 after raising our portfolio-occupancy assumption to 97.5% from 96%.

Valuation

• We have raised our six-month target price to S$0.54 (from S$0.53), based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 7.5%. Cambridge trades at a 12-month forward yield of 11.1% based on our revised DPU forecasts. NAV was S$0.60 as at 30 September 2009.

Catalysts and action

• We maintain our 2 (Outperform) rating for Cambridge, as we believe its recent operating performance highlights the stability of its distributions. We believe Cambridge faces a moderate risk of equity fundraising, since the manager has guided for a long-term target gearing ratio of 30-35% compared with the latest gearing of 42.6%. However, the DPU dilution could be moderated from a successful sale of some assets above book value.