Category: ESR
Industrial REITs – OCBC
2Q12 RESULTS ROUNDUP
•Interim results matched projections
•Positive performance to carry on
•Good capital and lease management
Consistent set of results
Industrial landlords continued to deliver, meeting expectations for 2Q12. YoY growth in NPI ranging from 3.9-26.4% was seen among the REITs, bolstered by contribution from completed developments/ acquisitions, positive rental reversions and improved operational performances. Mapletree Industrial Trust was the top performer for the quarter, raking up 14.1% YoY increase in DPU. This was followed closely by Cambridge Industrial Trust and Ascendas REIT, with 13.9% and 10.3% growth respectively. Only AIMS AMP Capital Industrial REIT (AAREIT) and Cache Logistics Trust (CACHE) saw a sequential decline in DPU. However, this was due to the absence of distribution in retained income seen in 1Q by AAREIT. For CACHE, we note that it was attributable to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income.
Positive outlook remains
Going forward, we believe that industrial REITs will likely maintain their financial performances. While most of the landlords acknowledge that the macroeconomic landscape has remained uncertain and volatile, they expect stable results from their portfolios, driven by contribution from recent investments and healthy leasing activities in the industrial space. A few industrial REITs also cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets.
Occupancy rate and gearing remained at healthy levels
Industrial REITs, we note, have also done well on their lease and capital management. The subsector average occupancy rate as at 30 Jun stood at 98.4%, representing a 60-bp improvement QoQ, while the weighted average lease to expiry held steady at 3.6 years. This reflects active portfolio management and continued strong demand for industrial property. In addition, the subsector aggregate leverage average was still comfortable at 33.5% (vs. 33.9% in 1Q). As such, we maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics Trust remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.
Cambridge – DMG
Another attractive quarter
2Q12 results in-line with expectations. Cambridge Industrial Trust (CIT) just released its 2Q12 results posting gross revenue and net property income of S$21.5m (+10.4% YoY) and S$18.4m (+8.8% 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 1.180S¢ (+13.9% YoY), equivalent to 24.4% of our FY12 DPU estimate. 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. On the back of falling risk free rate to historic low together with the improvement in the quality of assets of CIT, we maintain our BUY call on CIT with a revised DDM based (COE: 9.8%, terminal growth: 1.0%) TP of S$0.660. With CIT currently trading at 7.2% spread vs the pre-crisis historical mean of 4.6%, our TP represents a spread of 6.3% posting a potential upside of 11.8%
Multiple acquisitions and AEIs a positive for DPU. Since the beginning of the year, CIT has completed three acquisitions (namely: 16 Tai Seng Street, 25 Pioneer Crescent and 3C Toh Guan Road East) and proposed a future acquisition at 30 Teban Gardens Crescent. Together with the completion of the BTS project at Tuas View Circuit by August 2012, we expect CIT’s DPU to grow by c.0.5S¢ (+12%) in FY12.
Pro-active management with room for slight positive reversion. CIT’s management continues to be pro-active in engaging tenants early on negotiations of lease renewals in a bid to reduce lease concentration. Average lease expiry profile for FY13/14 continues to decline to 46.3% from >50.0% last year. Currently, CIT’s portfolio occupancy is at 99.1%, together with a high average security deposit of 12.9 months, and a WALE of 3.1 years, we believe CIT’s portfolio will continue to remain defensive amid a volatile global economy.
Acceptable gearing amid multiple acquisitions. 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, gearing has been pared down from 42.6% in Dec 2009 to 35.8% in Jun 2012. With an internal target gearing 40%, CIT will still has some room for further acquisitions. Together with an attractive yield of 8% and a strong pipeline of acquisitions, we maintain our BUY rating with a revised TP of S$0.660.
CIT – DMG
New acquisition in the pipeline
Acquisition of 30 Teban Gardens Crescent. The management of Cambridge Industrial Trust (CIT) just announced the proposed acquisition of the property at 30 Teban Gardens Crescent for a purchase consideration of S$41.0m. 30 Teban Gardens Crescent is a purpose built 3-storey industrial building with a single storey factory cum car showroom. Upon completion of the acquisition, the building will be let out to Eurosports Auto Pte Ltd, a representative of luxury European automotive brands such as Lamborghini and Lotus, for a period of 6 years. Under the terms of the contract, a brand new annex block of a 2-storey showroom with ancillary office is to be built by Eurosports Auto prior to the acquisition. The gross floor area of 30 Teban Gardens Crescent is expected to be approximately 12,922 square meters upon completion of the construction works. Given a forecasted annual NPI of S$3.2m, the cap rate of this property is estimated at 7.8%. Maintain BUY on CIT with a DDM-based TP of S$0.605.
Extension of lease with the addition of a building. 30 Teban Gardens Crescent has an initial lease term of 10 years, commencing from 1 June 2007. A further lease term of 22 years will be granted by JTC on the condition that the proposed 2-storey showroom with ancillary office is constructed. As this acquisition is expected to be completed only in 4Q13, no announcement has been made with regards to the method of financing this acquisition at the moment.
Pro-active management and extension of WALE. Although the lease on this piece of land is comparatively shorter than CIT’s portfolio (38 years), we view this acquisition as an effort by the manager to diversify the income stream while at the same time enlarging their tenant base. As indicated by management, with this acquisition, CIT’s WALE will be extended to 3.3 years from the current 3.2 years.
Minimal impact to DPU. Upon completion of this acquisition, we believe the additional NPI contribution will have minimal impact on the DPU of Cambridge Industrial Trust. We maintain our BUY call with an unchanged DDM-based (COE:10.7%, terminal growth: 1.0%) TP of S$0.605.
Cambridge – DMG
A sale not to be missed
Earlier this month, CIT announced the desire to sell their industrial property at Lam Soon Industrial; a 230,915 sq ft freehold site located at Hillview Avenue. At that time of announcement, management was unwilling to provide a target selling price as various hurdles, including convincing other owners to sell, have to be overcome before the sale could be moved forward. However, we speculate the sale of this site to be progressing as CIT, who currently owns c.69% of the building, has officially put the site up for sale on 23rd May 2012. With an indicative pricing of S$330m (equivalent to S$925 psf after including a development charge of S$80m), we view this sale positively as the target selling price is 3.7x the valuation of the property as at December 2011. Reiterate BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.605.
Site most likely to be sold to developer. Under the 2008 master plan, the Lam Soon site is zoned for “residential” use with a gross plot ratio of 1.92. Although there are strong demands for light industrial space in Singapore, given that the vicinity of Hillview had been developed into a residential area, together with further infrastructure development including the upcoming Hillview MRT station scheduled to be completed by 2015, we expect the site to attract strong interest from residential developers. At the moment, we believe this site can be redeveloped into a 10-storey residential development comprising 370 apartments fetching an average of S$1200-1400 psf.
Sale could improve both gearing of the company and inspire further growth. With an estimated cap rate of 4.7% on this building and assuming the transaction to be completed in 4Q12, we estimate a loss of approximately 1.6% of CIT gross income from this sale. However, with the proceeds from this sale, it gives the trust a significant warchest of capital for future acquisition of higher yielding industrial buildings for its portfolio. Reiterate BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.605.
CIT – DBSV
High stable yields
• 1Q DPU makes up 24% of our FY12 forecast
• 2H earnings driven by new and impending acquisitions, as well two soon to be completed built-to-suit projects
• Maintain BUY with an unchanged TP of S$0.58
Highlights
DPU of 1.171 Scts in line. Both topline and net property income grew 8% each to S$20.9m and S$18.0m respectively. Growth was driven by contribution from properties acquired (where CREIT acquired close to 5 properties since a year ago) coupled with annual rental hikes for certain properties in its portfolio. Average occupancy remained high at 98.6%, while arrears remained low at 0.1% (vs 0.6% in 4Q11). Interest costs were lower due to oneoff costs incurred a year ago due to refinancing activities. As a result, distributable income grew by 17% to S$12m, translating to a DPU of 1.171 Scts (+17% y-o-y). We note that CREIT has also announced that a dividend reinvestment plan will be instituted in the quarter ended Mar’12.
Our View
Built-to-suit projects, AEI remain on track. The trust had a busy quarter, completing close to S$50.8m worth of acquisitions with an additional S$72.8m (16 Tai Seng Street) on option, which we believe will complete in the coming quarters. Development of two built-to-suit projects (Tuas View Circuit & Peter’s Polyethylene Industries Pte Ltd) will start contributing to earnings from 2H12, pointing to an even stronger FY13.
Resilient balance sheet, more acquisitions in 2H12 will be positive. Gearing at c.36% is within management’s comfortable range. The manager has a S$500m MTN program on tap for potential acquisition opportunities. We also note that CREIT will also be receiving S$102m in cash from the Singapore Land Authority (SLA) in Jan 13 arising from the compulsory acquisition of its properties. We believe management is actively looking to redeploy the proceeds to limit potential earnings downside.
Recommendation
BUY for higher relative yields of 8.8%-9.3%. CREIT remains attractive for its stable FY12-13F yields of c. 9%. Re-rating catalysts hinge on deployment of cash (cS$90m as of end-4Q11) on the balance sheet and incoming cash (est. S$102m by Jan 13) into income-producing acquisitions.