Category: ESR
Cambridge – CIMB
It’s all about debt
Proactive capital and risk management has allowed CIT to be in a stronger position than before. Given its robust balance sheet, we believe CIT is well positioned to make acquisitions when the opportunity arises while continuing to grow through AEIs.
3Q13 results were largely in line with our and consensus estimates. 3Q13 DPU accounted for 24% of our FY13 forecast, with 9M13 DPU meeting 72%. We tweak our model to account for the slightly weaker than expected results and roll over our valuations to FY15. In view of the strong balance sheet, we upgrade our rating from Neutral to Outperform with a higher DDM-based (discount rate: 8.3%) target price of S$0.79.
Proactive management
3Q13 DPU was up 3.9% yoy, mainly the result of additional rental income contribution from the four acquisitions completed earlier this year. During this quarter, portfolio occupancy remained high at 97%. Recently, CIT refinanced S$250m of debt facilities maturing in 1H14 and, in the process, lowered the trust’s borrowing cost to c.3.9%. During this process, S$81.3m from the proceeds from various divested properties, including 63 Hillview Avenue, was used to retire part of the S$208m term loan due in 1H14 while the remaining S$100m was refinanced to June 2016. By doing so, CIT’s gearing was reduced to a healthy 27.9% (vs. 35.8% in 2Q13) with no refinancing needs till 2015.
Capital efficiently used
By retiring some of its debt, we estimate CIT saves c.S$3.3m p.a. in terms of interest expenses. Interestingly, this is more yield-enhancing than owning 63 Hillview, which was only giving a yield of 2.3% vs. the all-in interest cost of c.4.0% CIT was paying. All-in interest cost post re-financing is reduced to 3.9%.
Upgrade to Outperform
Although the acquisition market remains challenging, we believe a strong balance sheet will allow CIT to be well positioned to make any acquisitions/AEIs when opportunity knocks. In addition, the long debt expiry profile, together with c.86% of debt under a fixed rate, will allow it to weather any hikes in interest rates.
Cambridge – DBSV
Moving to larger projects
- Divesting Lam Soon Industrial Building at 28% above book value
- Not the optimal sale scenario but deployment of proceeds to be accretive
- TP adjusted S$0.78 as we revert to DCF valuation; Reduce to HOLD
Divesting Lam Soon Industrial Building. Cambridge Industrial Trust (CREIT) announced that it is proposing to divest Lam Soon Industrial Building (or 63 Hillview Avenue) for S$140.8m. The proposed selling price represents CREIT’s 69.4% stake in the strata share value of the property (97 out of 154 free freehold strata units) and is a 28% premium over the latest valued book value. The exit yield is estimated to be c2.3%. The buyer is QF Properties Pte Ltd which is a JV set up by Enviro-Hub Holdings Ltd (listed on SGX) and BS Capital, a wholly owned company of its chairman, Mr Raymond Ng.
Not the optimal sale scenario but proceeds can still be utilised accretively. After two unsuccessful lengthy enbloc sale attempts aimed at maximizing the value of the property, the manager has chosen to exit through the sale of its entire 69.4% stake to a single buyer, rather than holding on to its investment or through a strata-sale on a piecemeal basis. Despite settling for a lower selling price, the manager would be able to efficiently deploy proceeds to higher yielding sources (repay debt, which saves CREIT c3.5% p.a. or part fund its various development projects which returns c 7.5%-8.0%) compared to the c2.9% from Lam Soon Industrial Building based on its book value. In addition, we view that a strata-sale process is not optimal given that it is likely to be a lengthy process coupled with uncertainty regarding the eventual sale of its entire stake.
Downgrade to HOLD, TP S$0.78. Our DPU/NAV estimates are revised slightly to account for the lower than projected sale value. We have also switched our valuation methodology back to DCF compared to SOTP previously where we had factored in the full potential of an enbloc sale and development of its portfolio. Our new DCF-based TP is S$0.78. We continue to like management for their ability to unlock value from their assets and believe this activity would likely continue over time. However, in the near term, we see lack of near term catalyst for outperformance in view of the execution of this sale. Stock price have held up fairly well in the recent market sell-down and given the current limited total return upside, we are cutting our call to a HOLD.
Cambridge – Lim & Tan
- Cambridge Industrial Trust announced that it had divested its entire stake in the freehold property located at 63 Hillview Avenue, Lam Soon Industrial Building for a consideration of S$140 million to mainboard-listed Enviro-Hub Holdings and BS Capital.
- This represents approximately 28% above the current book value of Cambridge’s entire stake in the Property of S$110 million. This is in higher than Cambridge’s current P/B value of 1.1X for the overall Group.
Assuming the whole amount would be used to reduce debt, its gearing ratio is expected to reduce from the current 38.6% to 30.4% which is at the lower range of management’s preferred guidance of 30% to 40%. Likewise, its dividend per unit (DPU) is expected to increase by 0.06 cents to 4.844 cents, and its net tangible asset per unit could rise by 2.53 cents to 67.33 cents.
- This divestment by Cambridge is expected to be well received by the market, given that the yield on the Lam Soon Industrial Building is much lower than that of its overall assets. Going forward, we believe that Cambridge has the capacity to undertake further accretive acquisitions given that its gearing is brought down by this asset disposal.
Cambridge – CIMB
Quality yields
We took management on a non-deal roadshow to Singapore, Hong Kong and Malaysia. We found investors generally less familiar with the industrial space and the role of government regulation in Singapore, which mitigates landlords’ exposures to uncertain macros.
IPO assets pave the way for 5-10% rent reversions and development works in FY13/14. Combined with record acquisitions and BTS projects from 2012, we estimate 5% CAGR DPU growth for FY13/14 and strong yield of 7%. We adjust FY13-15 DPUs on reversions and development works, raising DDM-based target price (7.7% discount rate). Maintain Outperform. Accretive acquisitions and development works are catalysts.
A regulated sector
We found offshore investors largely unfamiliar with Singapore’s industrial regulations. The oversupply risk was overstated, while the demand for industrial space was underestimated. JTC’s requirement of owners occupying more than 50% of space results in high pre-commitment levels, despite larger industrial pipeline supply (ex-business parks), while lease renewals before expiries and tenant requests for additional space point to business expansion within Cambridge’s portfolio of 169 tenants. The impact of new measures was a hot topic at the roadshow. Management said reducing the industrial lease tenure from 60 to 30 years had the biggest impact – it reduced demand for BTS projects.
Key drivers for 2013
Management announced nine acquisitions in 2012, with five competed in 2012, two completed YTD and two remaining. These deals, along with full-year contributions from 2012 AEI and developments completed, should lead to FY12-14 DPU CAGR of c.4%.The focus in the next two years will be on master leases expiring, 11% in FY13 and 22% in FY14. Some assets will be divested and others converted to multi-tenanted buildings with expected reversions of 5-10%. Planned plot ratio enhancements of S$50m-100m a year in FY13/14 are expected to boost growth further.
Sweet spot for acquisitions
The share price has re-rated and the stock now trades at a 15% premium to book value, making it easier for acquisitions to be accretive. Yet with vendors raising price expectations, Cambridge will focus on development projects over FY13-14 and ruled out pre-emptive equity fundraising.
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.