Category: ESR
Cambridge – Phillip
Cambridge Industrial Trust reported results for 2Q09. CIT recorded gross revenue of $18.5 million (+2.8% yoy, flat qoq), net property income of $16.0 million (+0.9% yoy, flat qoq) and distributable income of $10.7 million (-13.8% yoy, +0.04% qoq). DPU for 2Q09 is 1.345 cents.
Gross revenue is stable with slight growth over the quarters. Occupancy rate improves slightly from 99.2% in 1Q09 to 99.5% in 2Q09. Distributable income has however decreased since 1Q08 to 1Q09 before improving slightly in 2Q09. The main reason for the decrease is the progressively higher interest cost CIT paid on its loans. CIT has maintained a gross margin of approximately 0.9x. Distributable income margin dropped from 0.7 in 1Q08 to the 0.6x level. We expect it to maintain at this level as interest payment should not varies much for the remaining term of loan.
Property portfolio was revalued downwards by 9%. Portfolio value fell from $967.7 million to $880.3 million. Correspondingly, gearing rises from 39.8% to 43.8%. CIT single loan maturity of $390 million is due in 2012. A point of concern is that further portfolio valuation drop may starts to breach bank covenants. CIT needs to maintain a LTV ratio below 0.55 and interest cover above 2.2x. Currently CIT has a LTV of 0.46 and interest cover of 3.2x. We estimate portfolio value will have to fall a further 17% before the LTV covenant is breached.
Our revenue forecasts have assumed a portfolio vacancy of 3%. Portfolio performance in the last two quarters was lower than our assumptions. We thus revise our vacancy assumption to 1%, still slightly conservative compared to CIT actual occupancy rate. We have also revised down the management fee following the downward revaluation of the portfolio. We raise our DPU forecast from 4.73 cents to 4.93 cents. Fair value is raised marginally from $0.44 to $0.45. In view of the recent run-up in price, we lower our rating from Buy to Hold.
Cambridge – BT
CAMBRIDGE Industrial Trust is not taking up an option to buy and lease back a $55.2 million industrial property at Tai Seng Street.
The vendor, Natural Cool Holdings, announced the termination of the option agreement yesterday.
Cambridge, which was to have secured equity financing for the purchase by June 30, informed Natural Cool that it was not proceeding with the purchase.
Natural Cool secured shareholder approval for the sale back in November 2007. The plan was to sell Lot 6501T at Tai Seng Street/Tai Seng Avenue to Cambridge and to lease back the property at not more than 8 per cent of the purchase price a year. The lot had leasehold interest for 30 years with an option to renew for a further 30 years.
The agreement was later delayed after certain changes in the terms and conditions were agreed.
Industrial REITs – Daiwa
2Q09 preview – some minor deterioration expected
What has changed?
• The Singapore-listed real-estate investment trusts (S-REITs) in the industrial space are due to be among the first to announce their 2Q09 results, from 17 July.
Impact
• We expect minor (0.6-2.6%) quarter-on-quarter declines in net-property income (NPI) arising from a slight uptrend in overall vacancy rates and a more challenging leasing environment (for renewals).
• We expect year-on-year declines in their distribution-per-unit (DPU) due to equity fundraising for Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT), and higher borrowing costs for Cambridge Industrial Trust (Cambridge).
Valuation
• We believe the implied trading yields (implied cap rates) of 8.1% for MLT and 10.9% for Cambridge (based on our estimates) are attractive relative to the cap rate of 7% for Singapore industrial properties. From this perspective, AREIT is unattractive, at an implied trading yield (based on our estimates) of about 6.6%.
Catalysts and action
• We maintain our Negative rating for the industrial segment, and our 4 (Underperform) rating for AREIT, which we believe continues to trade at an excessive premium (at a price to NAV of 0.94x) to the sector and its industrial peers.
• We believe the biggest risk to this segment is the relentless decline in asset values, down 7-11.3% QoQ for 2Q09 and in line with similar quarter-on-quarter falls for industrial rents, according to Jones Lang LaSalle.
• We maintain our 3 (Hold) rating for MLT as we believe it offers reasonable value, but little else now that its acquisition-growth model has stalled.
• Our top pick in this segment is Cambridge, 1 (Buy) rating, for its attractive valuations and, in our opinion, highly defensive lease-renewal profile. We believe a positive price trigger for Cambridge would be a well-timed asset disposal that would help reduce gearing.
Cambridge – CIMB
Room to catch up
• Maintain Outperform. CREIT has a small asset size with tenant concentration risks, unlike its much larger peers, A-REIT and MLT. Nonetheless, we expect its rental income to stay visible in the medium term with all its tenants on long leaseback arrangements with built-in rent increases.
• Concerns remain but limited lease expiries over next four years. Only 30% of its master tenants are end-users of its industrial space. CREIT also has a heavy reliance on its top 10 tenants for gross revenue. Nonetheless, we take comfort that management is managing its tenants and sub-tenants much more tightly, taking steps to ensure tenant sustainability. Limited lease expiries of only 5.4% over the next four years add some certainty to occupancy sustainability.
• DDM-derived target price raised to S$0.48 (from S$0.47). We maintain our estimates but use a lower discount rate of 9.4% (from 9.6%) based on a lower riskfree rate of 4.8% applied across our REIT universe. CIT remains the cheapest industrial REIT under our coverage. P/BV has risen to 0.5x, but still lags behind the REIT sector’s 0.6x average. We believe there is room for price upside.
Cambridge – Phillip
CIT has no near term refinancing worries, as its single loan maturity of $390 million is due in 2012. The current gearing is 40%. Although it has not mention any plans of acquisition, CIT has a LTV covenant of 50%, which effectively allows it to gear up a further $200 million. However we feel that acquisition using pure debt to push the gearing limit is not a prudent move as seen in the last round of panic refinancing in the REIT sector. Therefore we believe with the three years time frame to the next loan maturity date, CIT will undertake some form of recapitalization measures to fuel its growth plans.
Property portfolio continues to perform within expectations. Occupancy rate for 1Q09 was 99.2%. The current focus for management is to actively manage its property portfolio so as to maximize the usage of space and renegotiate leases to dilute expiry profile concentration. Management has also indicated asset rebalancing whereby the REIT divests smaller underperforming assets.
We had assumed a 3% vacancy rate for 2009F and 2010F. Demand for industrial space should be buoyant from 2011 as supply is expected to stay flat according to URA schedule of industrial space. We raise the fair value estimate from $0.31 to $0.44 on lower assumption of WACC at 9.96 versus our previous assumption of 11.4. We upgrade our recommendation from Hold to Buy.