Growing distributions

• 3Q11 DPU of 1.08 Scts (+6% qoq) in line

• Deployment of cash to develop projects/new purchases; FY12/13 earnings continue to grow

• Offers F Y11-13F yields of over c10-11%, BUY!

Results in line; DPU growth continued in 3Q11 Gross revenues and net property income were up by 13.9% and 10.3% to S$20.7 m and S$17.6m respectively. This increase was contributed by additional rental income from new acquisitions, which more than offset income loss from its divestments. Occupancy levels remain high at 98.7%. Interest costs also saw a dip of 43% yoy due to refinancing at a lower all–in rate of 4.1% (5.9% previously). As a result, distributable income came in at S$12.9m, +19% yoy. DPU was lower by 8.8% yoy due to increased share base from share placement in April’11, but is an improvement from a quarter ago.

Deployment of cash to develop projects/new acquisitions. Cambridge REIT (CREIT) continue s to expand its portfolio with the announcement of the signing of a new built-to-suit project (BTS) at Seletar Aerospace Park View and the acquisition of 25 Pioneer Crescent for a total of S$23.7m. These properties will be leased back on long-term contracts with Air Transport Training College (ATTC) for the former site for 30 years, and the latter for 15 years lease with option to extend for further 15 years. This together with continued asset enhancement program at various properties and other BTS projects, we slightly raised our FY12/13 earnings to account for new acquisitions/BTS projects.

Attractive FY11-13F yield of c10-11%. Ongoing asset recycling by the manager will ensure that CREIT’s portfolio remain fresh and relevant. Gearing of 33% is comfortable and with no debt refinancing over the next 2 years. The credit & risk profile of CREIT has vastly improved compared to GFC period in 2008-09. Prospective FY11-12 DPU yield of 9.5-11.1% is attractive. Maintain BUY with revised TP of S$0.58 as we roll forward our numbers to FY12.

A better 2H11 expected

At a Glance

• Steady 2Q11 results

• New properties to underpin earnings growth in 3Q111

• Buy for high yields of 8.9-10.0%. TP of S$0.56 remains unchanged

Comment on Results

A steady 2Q11 results. Cambridge REIT (CREIT) reported a steady set of 2Q11 results with topline increasing 6.6% yoy to S$19.5m and a 4.9% increase in net property income to S$16.9m. The improved performance was largely due to contributions from acquired properties over the past 3 quarters, and rental escalation of certain properties. This more than offset the income vacuum from the divestment of certain assets. Portfolio occupancy remained high at 99% with low arrears of 0.5%. Operational performance on a qoq basis remained stable. While distribution income came in at S$12.3m (+14.0% yoy,+3.5%qoq), DPU of 1.036 Scts is 17% lower yoy owing to a larger unit base.

Portfolio divestment completed; new properties to contribute from 3Q11 onwards. The trust has completed divestment of the remaining 6 strata units at 48 Toh Guan Rd (Enterprise Hub) at 10.8% above valuation. In addition, the recent completion of 4&6 Clementi Loop and 60 Tuas South Street 1 will start to contribute meaningfully in the coming quarter.

Revaluation gains of S$47.8m at half-time. CREIT also reported revaluation gains of S$47.8m (on a like for like basis, after netting off its divestments and new properties acquired), bringing its total portfolio size to S$1.1bn. NAV inched up slightly to S$0.62. Gearing remained steady at 32.7%.

Recommendation

BUY for relatively higher yields of 8.9%-10.0% . CREIT remains attractive for its FY11-12F yield of over 8.9%, higher than S-REIT peers. Our FY11 DPU is adjusted slightly downwards due to later than expected completion of its acquisitions.

Completed acquisitions to boost 2H11

2Q11 DP U in-line with expectation. Cambridge Industrial Trust (CIT) reported a lower DPU of 1.036S¢ in 2Q11 (-16.3% YoY; +3.5% QoQ) due to enlargement of share base as a result of rights issue undertaken in Apr 2011. Net property income rose 4.9% YoY to S$16.9m (+2.0% QoQ) on the back of higher rental income partially offset by loss of income from divested strata units. Separately, CIT has concluded three acquisitions, which it has announced previously, in Jun- Jul 2011. Hence, we expect CIT’s DPU to pick up in 2H11. However, there remains an acquisition with purchase price of S$41m that is not completed. Given that it is unlikely the outstanding acquisition will be completed in 3Q11, we lowered our FY11DPU estimate by 1.5% to account for the expected completion of the acquisition only in early 4Q11. However, due to half-year rolling forward of our DDM valuation, we raised our TP marginally to S$0.595 (COE: 10.1%, TGR: 1.0%). Maintain BUY.

Newly completed acquisitions to begin contributions in 3Q11. During Jun-Jul 2011, CIT completed three acquisitions which it announced in Oct 2010 and Mar 2011, namely, 4 & 6 Clementi Loop, 60 Tuas South Street 1, and 5 & 7 Gul Street 1. We expect these newly acquired properties to contribute 0.2-0.4S¢ in DPU for FY11-12 respectively.

Currently trading at 6.5% spread to 10-year bond yield. CIT is currently trading at 6.5% spread to 10-year bond yield, which is 194bps above its pre-crisis mean spread of 4.6%, based on FY11 DPU. Key risk to the stock is the concentration of lease expiry in 2013/2014 at >50% of total rental income. Upon 1) smoothing out lease expiry profile, 2) illustrating consistency in securing higher rentals during renewals, and 3) acquiring more good quality, yield accretive assets, we believe CIT will then be able to trade at higher valuation.

CIT’s Q2 distributable income rises 14%

CAMBRIDGE Industrial Trust’s (CIT) distributable income rose 14 per cent to $12.3 million for the second quarter compared to a year ago.

Its distribution per unit (DPU) for the three months to end-June was 1.036 cents, down 16.3 per cent from 1.238 cents in Q2 2010.

Compared to the distribution of 1.001 cents per unit in Q1 this year, its DPU rose 3.5 per cent. The latest distribution will be paid on Aug 25, the trust’s manager said.

Despite an expected slowdown in economic growth in the second half of the year, CIT’s manager said that it expects to be able to deliver ‘a stable and secure income stream to its unitholders by maintaining high occupancy levels of its existing properties and acquiring new properties that enhance CIT’s distributions’.

Revenue for the industrial real estate investment trust climbed 6.6 per cent to $19.5 million in Q2 compared to the same period a year ago, mainly due to higher rental income after the acquisition of five properties from September last year to June this year.

Its net property income – after deducting land rents, fees, taxes and other property expenses – rose 4.9 per cent to $16.9 million, from $16.1 million a year earlier.

Non-property expenses nearly doubled to $14.1 million, from $7.3 million a year ago, due mainly to a sharp rise in borrowing costs from $5.7 million to $12.4 million.

That increase was mainly due to accelerated amortisation of fees and costs related to a $303.1 million syndicated term loan that was refinanced with a new $320 million term loan in June, and break costs associated with the refinancing.

For the first six months of the year, CIT’s distributable income rose 10.7 per cent to $24.2 million, as revenue rose 5.2 per cent to $38.8 million.

The trust had total assets of $1.097 billion at the end of June, up from $1.001 billion at end-2010.

Its portfolio at end-June comprised 45 properties with 657,749 square metres of lettable area, leased to 105 tenants. The total portfolio value was about $1.003 billion. The average occupancy rate for its properties in Q2 was 99.02 per cent, with a weighted average lease to expiry of 3.7 years.

CIT units last traded at 50.5 cents yesterday before the earnings announcement, up half a cent from Monday’s closing price.

Detail s of potential acquisition revealed

Acquisiti on of 5 & 7 Gul Street 1. Cambridge Industrial Trust (CIT) has entered into a put and call option agreement with Precise Industries Pte Ltd in connection with the proposed acquisition of the property at 5 & 7 Gul Street 1. This proposed acquisition has previously been referred to as ‘Potential Property 2’ during the rights issue announcement on 10 Mar 2011. In the latest announcement, the purchase price of 5 & 7 Gul Street 1 has been revised upwards from S$12.5m to S$14.5m. In addition, initial rental for the lease has been agreed at S$1.36m/year which works out to be ~9.4% gross rental income yield. Previously, we have assumed 8% gross yield from this acquisition. Following the announcement, we revised our FY11-12 DPU estimates upwards by 0.2-0.1% respectively. Maintain BUY with unchanged TP of S$0.59.

Detail of another potential acquisition yet to be revealed. During Mar 2011, CIT revealed that it was undertaking rights issue in order to finance the purchase of 4 & 6 Clementi Loop and two other properties in Western part of Singapore. Whilst one of them has been revealed as 5 & 7 Gul Street 1, the other potential acquisition in the west remains anonymous. Previously indicated purchase price of this anonymous acquisition was S$41m. We have factored in a gross yield of 8%, implying gross rental income contribution of S$3.3m/year to CIT (~4% of our FY12 gross rental income estimate).