Category: ESR
Cambridge – DBS
Looking Steady
At a glance
• Results were in line with our estimates
• Only 6% of income to be renewed in next 4 years
• No ST refinancing requirements
• Maintain BUY, TP S$0.38
Comment on Results
Stable performance. Cambridge Industrial Trust (CIT) 1Q09 results were line with expectations. Gross revenues and NPI grew by 4% and 3% respectively to S$18.3 and S$16.1m respectively. The growth in performance was mainly as a result of additions from properties purchased in 2H08 and rental escalation from 21 of its properties. On a QoQ basis, performance remained flat. Distributable income was 19% lower largely due to higher interest cost on the new debt and management election to receive their fees in cash. DPU for 1Q09 was 1.291 Scts.
Gearing at 39.9% with interest coverage ratio (ICR) of 3.6x. These are within its loan covenants of an ICR of 2.5x and gearing of 55%. We note that CIT’s bankers will have the right to lockup cash proceeds in the event of CIT breaching the 50% gearing level. However, we view that it is unlikely to be breached, as it will involve a further estimated 20% reduction in asset values.
Portfolio valuation in 2Q09. Management informed us of the need to perform semi-annual valuations for its properties by its bankers. While we expect CIT to report further asset values write-downs in 2Q09, the quantum of devaluation should be mitigated by the fact that CIT properties are under-rented (signed on long term leases back in 2006) when compared to current market rents.
Recommendation
Maintain BUY, TP adjusted to S$0.38. CIT is expected to continue delivering a consistent FY09-10F DPU yield of 16% given good income visibility with (i) a secured income stream with average lease of 5.5 years, (ii) having only 6% of topline to be renewed in the next 4 years, (iii) locked in debt re-financing till 2012.
Cambridge – Phillip
On a quarter-on-quarter basis, gross revenue for 1QFY09 was flat at $18.4 million (+4.5% y-o-y), net property income increased 6.6% to $16.1 million(+3.2% y-o-y), distributable income decreased 5.5% to $10.3 million(- 18.2% y-o-y). DPU for the quarter is 1.291 cents.
CIT’s gross revenue for 1QFY09 registered flat growth, which was in-line with expectations, given there wasn’t any catalyst to earnings. Portfolio occupancy remains at a high 99.2%. However distributable income fell 5.5% and DPU fell 6.0% mainly due to higher interest expense incurred on the new loan.
CIT refinanced its loan in Feb 2009 and has no refinancing worries for the next three years. The refinancing comes at substantially higher interest of 5.9% and is the main reason for the decrease in DPU. Our previous estimate was an interest cost of 5.0%. Current gearing is 39.9%.
Without the overhang of refinancing worry, the only concern is whether CIT can maintain its portfolio occupancy. We continue to assume a portfolio vacancy of 3%. Revenue growth is supported by fixed rental escalation built into leases. We tweaked our assumptions to account for lower property expenses due to government rebates and also higher interest expenses vs our previous assumptions. CIT is currently trading at 60% discount to NAV. We have a forecasted FY09F DPU of 4.73 cents, which translates to 16.6% dividend yield. We apply WACC of 11.4% and terminal growth of 1% to our DCF valuation. Fair value is raised from $0.27 to $0.31. We maintain our HOLD recommendation.
Cambridge – CIMB
Holding fort in a difficult time
• We visited six of CREIT’s industrial properties recently, accompanied by members of its asset and property management teams, followed by a meeting with its new CEO, Mr Chris Calvert.
• Concerns we have include the fact that only 30% of its master tenants are endusers of its industrial space and CREIT’s heavy reliance on its top 10 tenants for its gross revenue.
• Short-term performance looks stable. We take comfort that management is managing its tenants and sub-tenants much more tightly, and taking steps to ensure tenant sustainability. Limited lease expiries of only 5.4% over the next four years add some certainty to occupancy sustainability.
• Maintain Outperform at S$0.53. Although there remain issues in CREIT’s portfolio, we are fairly confident that CREIT is not likely to face too much distress in the short to medium term. At 0.37x P/BV, CREIT remains more attractive than its two larger competitors AREIT (0.79x) and MLT (0.52x). Potential price upside of 89% and above-average yields of 17.5% make CREIT attractive despite uncertainties in the manufacturing sector. We maintain our Outperform and target price of S$0.53 (discount 9.6%), still based on DDM valuation.
Cambridge – Nomura
We cut our GAV estimate for CREIT by 3.5%, as we lower our industrial rental forecast to capture a peak-to-trough correction of 31.7% (vs. 23.9% previously). Lower GAV estimate suggests potential for CREIT to raise fresh equity to keep gearing within limit. Target price cut from S$0.30 to S$0.24. Maintain NEUTRAL.
Anchor themes
A rapid deterioration in the external sector and the economic outlook is likely to crimp demand for industrial/warehouse space amid rising new supply. We expect yields to soften by 150bp from June 2008, placing downward pressure on capital values.
Rental reversions/lease structures are likely to underpin REIT cashflows. That said, growing concerns over their ability to refinance debt have seen REITs trade below book. In such conditions, investors need to focus on underlying asset value/quality, while REITs with well-located assets should benefit from potential M&A activity.
Weaker asset outlook
- Worsening industrial outlook = a 3.5% cut in GAV estimate
- Lower GAV estimate = new equity potentially needed
- FY09-11F DPU cut 1.5% to reflect higher-than-previously guided cost of refinancing
- Maintain NEUTRAL; target price cut from S$0.30 to S$0.24
Industrial REITs – CIMB
Relative resilience
• Industrial P/BV at 0.37x; appears resilient. The industrial sector looks attractive at an average P/BV of 0.37x, close to the REIT sector average of 0.34x. Resilience is underpinned by a historical time lag between changes in leading industrial indicators (including NODX, sea and air cargo throughput) and occupancy levels that could exceed 12 months.
• Expect further support from government for industrial users. The government traditionally supports industrial users by reducing industrial land and building rents, and dishing out rental and property tax rebates. We anticipate this assistance to continue as the manufacturing sector remains the single largest driver of Singapore’s GDP. We expect industrial REITs to benefit three ways from this: 1) reduced land rent payments for industrial REITs; 2) increased sustainability for REIT tenants paying land rent directly to JTC; and 3) increased sustainability of the other industrial property users, on which industrial REITs’ tenants are inter-dependent.
• Low tenant default risks. Within the industrial REIT space, we prefer REITs with low tenant default risks. These would be represented by large and diversified asset and tenant bases, limited concentration on single tenants and significant MNC representation.
• Good capital management. All three industrial REITs are comfortably geared at below 40% with no major refinancing needs over the next two years. Cash calls for MLT and CREIT are not likely in the current year. In terms of capital management, all three industrial REITs look well-positioned to weather the storm
• Maintain Overweight; A-REIT our top pick. Among industrial REITs, we favour AREIT for its least tenant default risk, attributable to its large and diversified asset base, and large and quality tenant base. We also like MLT for its geographical diversification which moderates its risk of asset concentration. CREIT is our least preferred stock for its smaller asset base and higher tenant-concentration risks.