More surprises in 2013

• 4Q12 results in line; NAV written up by 4.4% with potential for further expansion
  
• Acquisitions and AEIs to contribute positively in the coming quarters
  
• BUY, raised to S$0.75
  

Highlights

4Q12 results in line. Cambridge REIT (CREIT) reported a 15.6% and 20.7% y-o-y rise in topline and net property income to S$24.0m and S$20.8m respectively. Growth was largely attributable to the additional income from the acquisition of five properties, rental escalations and higher reversions from its multi-tenanted properties, which more than offsets the impact of divestments. Portfolio occupancy remained high at 99.2% (vs 98.6% in 4Q11). Distributable income rose 12.4% y-o-y to S$14.9m (inclusive of S$3.3m of capital distribution), translating to a DPU of 1.229 Scts (+9.9% y-o-y).

NAV raised to 4.4% to S$0.64; further expansion possible. Portfolio valuations recorded a net gain of by 4.4%, NAV increased slightly 4.4% to S$0.64. We believe that further NAV expansion is possible with its recent acquisitions (54 Serangoon North Avenue 4 and 3 Tuas South Ave 4), which are purchased at attractive valuations. Gearing levels remained stable at 38.6% (36.0% after bridging loan repayment in the coming quarter).

Our View

Acquisitions and AEIs to contribute positively in the coming quarters. CREIT’s acquisitions of nine industrial properties worth a collective S$280.4m (of which five were completed in 2012) is likely to more than offset the loss of income from SLA’s compulsory acquisition of 30 Tuas Road and 1 Tuas Ave 3. In addition, the completion of various asset enhancement initiatives and development projects over the course of 2013 will mean incremental growth in revenues and distribution in the medium term. In addition, we see further divestment opportunities in the coming year as the management aims to keep its portfolio contemporary and relevant. Rental reversions in 2013-2014 likely to remain stable. A significant 44.6% of its leases are up for renewal (15% in FY13; 29.6%) where close to 2/3 are from its single-tenanted properties. While we note a potential risk that some of these master-leases might not roll over, this is mitigated by (i) expiring rents that are lower than market levels which means that these properties should see a net uplift in rental income eventually if fully let-out on a multi-tenanted basis (ii) seethrough occupancy for those properties are fairly high. Moreover, the manager is in active negotiations with the vendors to renew the leases ahead of their expiry.

Recommendation

BUY call maintained, TP S$0.75. Our target price is nudged up to S$0.75 after taking into account the latest announced acquisitions. CREIT continues to offer an attractive FY13-14F yield of 7.2-7.6%.

Yet another stable quarter

3Q12 results in-line with expectations. Cambridge Industrial Trust (CIT) just released its 3Q12 results posting gross revenue and net property income of S$22.5m (+8.5% YoY) and S$19.2m (+8.9% YoY) respectively. The increase in revenue is mainly attributed to additional contributions from the acquisitions at 16 Tai Seng Street, 25 Pioneer Crescent and 3C Toh Guan Road East. DPU for the quarter came in at 1.204S¢ (+11.3% YoY), equivalent to 25.1% of our FY12 DPU estimate. Going forward, we expect CIT’s DPU to continue to remain strong from 1) additional contributions from its acquisitions including the recently acquired properties at 11 Woodlands Walk and 30 Marsiling Industrial Estate Road 8; 2) resilient industrial rental rates coupled with average security deposits of 12.5 months; 3) new contribution from the BTS project at Tuas View Circuit which was completed in August 2012 and 4) future AEIs in the pipeline. On the back of continual interest in yield plays coupled with a prolonged low interest environment and high liquidity, we continue to favour CIT for its high dividend yield (c.7.2%) and the improvement in quality of its portfolio. Based on the abovementioned factors, we maintain our BUY call on CIT with a revised DDM based (COE: 9.3%, terminal growth: 1.0%) TP of S$0.750. With CIT currently trading at 6.6% spread vs the pre-crisis historical mean of 4.6%, our TP represents a spread of 5.7% posting a potential upside of 12.8%

Multiple acquisitions and AEIs a positive for DPU. Since the beginning of the year, CIT has completed five acquisitions (namely: 16 Tai Seng Street, 25 Pioneer Crescent, 3C Toh Guan Road East, 11 Woodlands Walk and 30 Marsiling Industrial) and proposed a future acquisition at 30 Teban Gardens Crescent and 54 Serangoon North Ave 4. Together with the completion of the BTS project at Tuas View Circuit, we expect CIT’s DPU to grow by c.0.5S¢ (+14%) in FY12.

Maintain BUY with revised TP of S$0.750. Management has been undertaking a portfolio reconstitution exercise since beginning of 2010, divesting nonperforming assets and redeploying capital into yield accretive acquisitions. Amid multiple acquisitions, net gearing has been pared down from 42.6% in Dec 2009 to 37.0% in September 2012. With an internal target gearing 40%, CIT will still has some room for further acquisitions. Together with an attractive forecasted FY12/13 yield of 7.2%/7.9% and defensive earnings, we maintain our BUY rating with a revised TP of S$0.750 as we roll over our forecast into FY13.

Proposed new acquisitions in the pipeline

Acquisition of 30 Marsiling Industrial Estate Road 8 and 11 Woodlands Walk. The management of Cambridge Industrial Trust (CIT) just announced the proposed acquisition of the properties at 30 Marsiling Industrial Estate Road 8 and 11 Woodlands Walk for a purchase consideration of S$39.0m and S$17.3m respectively. 30 Marsiling is a light industrial building with a GFA of 20,249 sqm. Upon completion of the acquisition, the building will be leased back to BIPL for a period of three years. The second property 11 Woodlands Walk is also a light industrial building with a GFA of approximately 8,977 sqm. Upon completion, the property will be leased to HFB for a period of five years. Given a forecasted annual NPI of S$2.8m for the property at Marsiling and S$1.4m for 11 Woodlands Walk, the yields from these properties are estimated at 7.2% and 7.9% respectively. Maintain BUY on CIT with a DDM-based TP of S$0.660.

Decent land tenure on both properties. According to the announcements, Marsiling Industrial has a land tenure of 30 years commencing from 1st December 1989, with an option to renew for an additional 30 years, while 11 Woodlands Walk has a balance tenure of 43 years. The management further indicated that the acquisition of the Marsiling property will be funded solely via debt facilities. Although no announcements have been made with regards to the method of funding for the property at Woodlands Walk, given the size of this acquisition we speculate that it would similarly be funded via debt and cash.

Property acquired to replace the lost of income as a result of SLA acquisition. Previously, SLA has announced a compulsory acquisition of two of CIT’s properties located in Tuas. Given that these properties will be sold to SLA by January 2013, these new acquisitions are seen as partial replacements to those in Tuas.

More acquisitions to be expected going forward. Since the forecasted NPI from these new properties only accounts for c.5.0% of CIT’s total NPI; while the two properties to be taken over by SLA makes up 11% of total revenue, we believe there will be more acquisitions going forward as management strive to replace the lost in income from the compulsory acquisitions. We maintain BUY on CIT with an unchanged DDM-based (COE: 9.8%, terminal growth: 1.0%) TP of S$0.660.

A pass at the sale of the year

As previously announced on 2nd and 24th May 2012, Cambridge Industrial Trust (CIT) has joined with other owners of Lam Soon Industrial Building to undertake an ‘en-bloc’ sale of the entire property at an indicative pricing of S$330m (equivalent to an estimated S$950 psf) – 2.5x the valuation of the property on books. Located in Hillview, Upper Bukit Timah, Lam Soon Industrial is a 230,915 sq ft freehold site zoned for residential use with a gross plot ratio of 1.92x. With regards to this matter, CIT has just announced that despite good interests on the property, a mutually agreeable pricing could not be reached and hence the en-bloc sale would not be carried out. Although this is a freehold piece of land, the indicative price may be on the high side after taking the development cost into consideration. Although CIT could have greatly benefitted from this sale, we believe CIT would continue to grow via other acquisitions and AEIs going forward while the management awaits a better time before carrying out another en-bloc sale. Maintain BUY on CIT with a DDM-based (COE: 9.8%, terminal growth: 1.0%) TP: S$0.660.

Selling price might be higher than what the developers are willing to pay. At S$330m, the indicative selling price translates to 2.5x the book value (for 79% ownership) of the property as per December 2011. Assuming a development cost of S$300-400 psf, the total cost of construction could add up to approximately c.S$1300-1400 psf. With the current selling price of S$1400-1600 psf for the residential development across the road of Lam Soon Industrial, coupled with uncertainty in the residential market, we believe the profit margin for developing this particular property may be too low for developers’ consideration.

CIT continues to remain attractive. With an estimated cap rate of 5.2% on this building, CIT could have greatly benefitted from this divestment. However, going forward, we expect CIT’s DPU to continue to remain strong from 1) additional contributions from its acquisitions, 2) resilient industrial rental rates coupled with average security deposits of 12.9 months, 3) the completion of the BTS project at Tuas View Circuit in August 2012 and 4) future AEIs in the pipeline. Maintain BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.660.

Still "Work in Progress"

• 2Q12 results in line, 1H DPU makes up 49% of our forecast.
• Acquisitions and AEIs to underpin earnings growth in the coming quarters
• Portfolio rebalancing continues, redeployment is key
• Maintain BUY, TP raised to S$0.65

Highlights

Improved set of 2Q12 results. Cambridge REIT (CREIT) reported a 10% and 9% y-o-y rise in topline and net property income to S$21.5m and S$18.4m respectively. Growth was largely attributable to the additional income from the acquisition of six properties a year ago, organic growth from rental escalations (single tenanted buildings) and higher reversions from its multi-tenanted properties. Portfolio occupancy remained high at 99.1% (vs 98.5% in 1Q12). This more than offset the loss of income from its divestments over the same period. Distributable income rose 15% to S$14.1m (inclusive of S$0.9m of capital distribution), translating to a DPU of 1.18 Scts (+14%).

Our View

Acquisitions and AEIs to contribute in coming quarters. With organic performance to remain stable, earnings growth will be driven by the recently acquired 16 Tai Seng Street (S$59.3m) and the expected completion of development of Tuas View Circuit (BTS for Peter Polyethylene) in Aug 12, while other development projects continue to remain on track for completion in the coming quarters up till 2013.

Portfolio rebalancing continues; redeployment of proceeds is key. The manager has 4 properties (worth S$198m) for sale – amongst them are two properties, valued at S$101.6m, which will be compulsorily acquired by SLA in Jan 13. We understand that plans are underway to redeploy capital towards new acquisitions and we believe the manager is looking to acquire these targets before the end of FY12 in order to compensate for the expected loss of rental income. We tweak our estimates slightly to account for the redeployment of proceeds from the SLA acquisition into new acquisitions in 2013.

Recommendation

BUY maintained, TP raised to S$0.65. Our target price is nudged up to S$0.65 after rolling forward our valuations and taking a lower discount rate with lower risk free assumptions. CREIT continues to offer attractive prospective FY12-13F yields of 8.0-8.3%. Downside risk to our estimates hinges on the slower than projected deployment of divestment proceeds.